Tuesday, July 31, 2012

Class XI, Principles of Economics, "Importance of Elasticity of Demand"


The concept of elasticity is not just an abstract idea its practical importance is very great.
(1) Importance For Government
The concept of elasticity of demand helps the finance minister of the monopolist. When it imposes a tax. When a tax is imposed the price tends to rise. But if the demand is very elastic it will considerably fall when the price has risen and thus the government will not be able to earn expected revenue. Thus this concept of elasticity of demand helps the government to impose the tax on a commodity whose demand lass elastic and hence earn valuable revenue.
(2) Importance for Businessmen
The businessmen also take cue from the nature of demand while fixing his price. IF the demand is inelastic he knows that the people must buy such commodities. Thus he will be able to change a higher price and big profits.
(3) Importance for Monopolist
The concept of elasticity of demand is of special importance to the monopolist. He is in a position to control the price and fix high price when demand is inelastic and low price when it is elastic will bring him the maximum profit.
(4) Application in Case of Joint Products
In case of joint products seperate costs are not ascertainable. Hence the producer will mostly be guided by the nature of demand while fixing the price.
(5) Determinitation of Wages
The concept of elasticity of demand influences the determination of wages of a particular type of labour. If the demand of particular type of labour is inelastic trade union can easily get their wages raised. On the other hand of the demand for labour is relatively elastic trade union trade unions may not be successful in raising wages.
(6) Importance for International Trade
The concept of elasticity of demand is used in calculating the terms of trade. Whenever a country fees an adverse balance of payment the government considers the elasticity of demand for the countries export and imports before devaluing its currency.

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