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
(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.
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.
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.
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.
Use in international trade. The term of trade between two countries are
based on the elasticity of demand of the traded goods.
Determination of rate of foreign exchange. The rate of foreign exchange is
also considered on the elasticity of imports and exports of a country.
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.
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.