Importance of price elasticity of demand
Elasticity of demand is used as tool to determine prices of factors of production. In case of inelastic demand prices are fixed high. When there is an elastic demand prices prices are fixed at low level.
Pricing for public services
Elasticity of demand is helpful in pricing of public services. High price is fixed if demand is inelastic. In case of elastic demand low price is charged from customers.
Prices and output determination
The producers make decisions about output and prices. Elasticity of demand is helpful information for producers. The price is high for less elastic demand. In case of elastic demand price is low.
A monopolist can follow price discrimination policy when elasticity of demand is different in different markets. The price is high in market where demand is inelastic. In other market demand may be elastic. The price is fixed low in such market.
The government can impose sales tax on different goods. Elasticity of demand is helpful to select goods for tax. When demand is inelastic tax is recovered from general public. In case of elastic demand tax recovery becomes impossible as people may refuse to buy goods.
Elasticity of demand is the basis for agriculture prices. In case of good crops the prices comes down due to no change in demand. The prices of products go up when there are bad crops due to inelastic demand.
Joint product prices
The price of joint products is fixed on the basis of elasticity of demand. The price of a product is fixed high if its demand is inelastic. The price of other products is fixed low due to elastic demand.
Sales policy in super market
In super market sales policy is determined on the basis of elasticity of demand. Lowering price level maximizes the sales. So cheaper goods are available.
Elasticity of demand for production determines whether or not machines will replace labor. In case of inelastic demand for production machines replace labor force. Due to elastic demand there is need of more workers.
Elasticity of demand is useful to determine benefit from devaluation. There must be elastic demand for imports and exports. In this way a country can get desirable results from devaluation.
The price of domestic goods increases due to tariffs. The government can use this policy if demand is less elastic. The people will bear the burden of increased prices. In case of elastic demand tariff policy cannot produce desirable results.
Gains from international trades
A country can gain from exports if there is elastic demand for fall in prices and inelastic demand for rise in prices. In case of imports if there is elastic demand for rise in prices and inelastic demand for fall in prices.
Subsidy by government
An industrialist can apply to government for grant of subsidy. The government considers the elasticity of demand of product. If demand is elastic subsidy is granted.