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Home Elasticity of Demand Importance of Elasticity of Demand

Importance of Elasticity of Demand:

 

(1) Theoretical Importance:

 

The concept of elasticity of demand is very useful as it has got both theoretical and practical advantages. As regards its importance in the academic interest, the concept, is very helpful in the theory of value. In the words of Keynes:

 

"The concept of elasticity is so important that in the provision of terminology and apparatus to aid thought, I do not think, Marshall did any greater service than by the explicit introduction of the idea of the elasticity".

 

(2) Practical Importance:

 

(i) Importance in taxation policy. As regards its practical advantages, the concept has immense importance in the sphere of government finance. When a finance minister levies a tax on a certain commodity, he has to see whether the demand for that commodity is elastic or inelastic.

 

If the demand is inelastic, he can increase the tax and thus can collect larger revenue. But if the demand of a commodity is elastic, he is not in a position to increase the rate of a tax. If he does so, the demand for that commodity will be, calculated and the total revenue reduced.

 

(ii) Price discrimination by monopolist. If the monopolist finds that the demand for his commodities is inelastic, he will at once fix the price at a higher level in order to maximize his net profit. In case of elastic demand, he will lower the price in order to increase, his sale and derive the maximum net profit. Thus we find that the monopolists also get practical advantages from the concept of elasticity.

    

(iii) Price discrimination in cases of joint supply. The concept of elasticity is of great practical advantage where the separate, costs of Joint products cannot be measured. Here again the prices are fixed on the principle. "What the traffic will bear" as is being done in the railway rates and fares.

 

(iv) Importance to businessmen. The concept of elasticity is of great importance to businessmen. When the demand of a good is elastic, they increases sale by towering its price. In case the demand' is inelastic, they are then in a position to charge higher price for a commodity.

 

(v) Help to trade unions. The trade unions can raise the wages of the labor in an industry where the demand of the product is relatively inelastic. On the other hand, if the demand, for product is relatively elastic, the trade unions cannot press for higher wages.

 

(vi) Use in international trade. The term of trade between two countries are based on the elasticity of demand of the traded goods.

 

(vii) Determination of rate of foreign exchange. The rate of foreign exchange is also considered on the elasticity of imports and exports of a country. 

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(viii) Guideline to the producers. The concept of elasticity provides a guideline to the producers for the amount to be spent on advertisement. If the demand for a commodity is elastic, the producers shall have to spend large sums of money on advertisements for increasing the sales.

 

(ix) Use in factor pricing. The factors of production which have inelastic demand can obtain a higher price in the market then those which have elastic demand. This concept explains the reason of variation in factor pricing.

Relevant Articles:

Meaning of Price Elasticity of Demand
Degrees of Elasticity of Demand
Measurement of Price Elasticity of Demand
Types of Elasticity of Demand
Factors Determining Price Elasticity of Demand
Importance of Elasticity of Demand
 

Principles and Theories of Micro Economics
Definition and Explanation of Economics
Theory of Consumer Behavior
Indifference Curve Analysis of Consumer's Equilibrium
Theory of Demand
Theory of Supply
Elasticity of Demand
Elasticity of Supply
Equilibrium of Demand and Supply
Economic Resources
Scale of Production
Laws of Returns
Production Function
Cost Analysis
Various Revenue Concepts
Price and output Determination Under Perfect Competition
Price and Output Determination Under Monopoly
Price and Output Determination Under Monopolistic/Imperfect Competition
Theory of Factor Pricing OR Theory of Distribution
Rent
Wages
Interest
Profits
Principles and Theories of Macro Economics
National Income and Its Measurement
Principles of Public Finance
Public Revenue and Taxation
National Debt and Income Determination
Fiscal Policy
Determinants of the Level of National Income and Employment
Determination of National Income
Theories of Employment
Theory of International Trade
Balance of Payments
Commercial Policy
Development and Planning Economics
Introduction to Development Economics
Features of Developing Countries
Economic Development and Economic Growth
Theories of Under Development
Theories of Economic Growth
Agriculture and Economic Development
Monetary Economics and Public Finance
History of Money

 

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