Question

What is the importance of elasticity of demand?​

Answer 1

Importance of Elasticity of demand

1. Price discrimination

If the demand for a product has different elasticities in different markets, then the monopolist can fix different prices in different markets. This price discrimination is possible due to different price elasticities.

2. Levy of taxes

The government will get higher revenue if tax is increased on goods having inelastic demand. Conversely, the government, will get lower revenue if tax is increased on goods having elastic demand.

3. International Trade

Terms of trade refer to the rate at which domestic commodities are exchanged for foreign commodities. The terms of trade will be favourable to a country if its exports enjoy inelastic demand in the world market.

4. Determination of volume of output

Volume of goods and services must be produced in accordance with the demand for the commodity. When the demand is inelastic, the producer will produce more goods to take the advantage of higher prices. Hence the nature of elastic and inelastic demand helps in the determination of the volume of output.

5. Fixation of wages for labourers

If the demand for workers is inelastic, efforts of trade unions to raise wages of the workers will be successful. On the other hand, if the demand for labour is elastic, they may not succeed in increasing the wage rate by trade union activity.

6. Poverty in the midst of plenty

The concept of elasticity of demand explains the paradox of poverty i.e. poverty in the midst of plenty. For example, bumper crop of food grains should bring agricultural prosperity but if the demand for food grains is inelastic, the agriculturist will be the loser if low price is paid.

${\huge{\boxed{\mathcal{\pink{hope\:it\:helps}}}}}$