Uses of elasticity of demand. Importance of Demand Elasticity in Business Economics 2022-10-25
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Elasticity of demand refers to the degree to which the quantity demanded of a good or service changes in response to a change in its price. It is a measure of the responsiveness of consumers to changes in prices and is an important concept in economics and business. There are several uses of elasticity of demand, some of which are discussed below:
Setting prices: Elasticity of demand can be used by firms to determine the optimal price for their products. If the demand for a product is elastic, it means that a small change in its price will result in a significant change in the quantity demanded. In this case, firms may choose to set a lower price in order to increase the quantity demanded and maximize their profits. On the other hand, if the demand for a product is inelastic, a small change in its price will not have a significant impact on the quantity demanded. In this case, firms may choose to set a higher price in order to maximize their profits.
Price discrimination: Elasticity of demand can also be used by firms to practice price discrimination. This is when a firm charges different prices to different groups of consumers based on their willingness to pay. For example, a firm may charge a higher price to consumers who have a higher elasticity of demand for a product and a lower price to consumers who have a lower elasticity of demand. This allows the firm to capture a larger share of the market and maximize its profits.
Government policies: Elasticity of demand can also be used by governments to design economic policies. For example, if the demand for a product is elastic, the government may choose to increase taxes on that product in order to reduce its consumption and achieve certain policy goals, such as reducing pollution or improving public health. On the other hand, if the demand for a product is inelastic, the government may choose not to increase taxes on that product in order to avoid a significant reduction in its consumption.
Market analysis: Elasticity of demand is also useful for market analysis and forecasting. By analyzing the elasticity of demand for a particular product, firms can predict how changes in its price will affect its sales and revenues. This can help them make informed business decisions and adjust their pricing strategies accordingly.
In conclusion, elasticity of demand is a useful tool for firms, governments, and analysts in understanding how consumers respond to changes in prices and making informed decisions. It plays a crucial role in setting prices, price discrimination, government policies, and market analysis, and is an important concept in economics and business.
Income Elasticity of Demand
Rate of Exchange and Balance of Payments: Elasticity of Demand. Different Stages for calculating income elasticity of demand Critical stages of trade cycle: The income elasticity of demand for essential things is low. The steeper the demand curve, the more inelastic demand is — meaning a small percentage change in price will not have a very big impact on the quantity demanded. Figure: Trade cycle 3. Consider the following example. The concept of elasticity has practical relevance.
Uses of Elasticity of Demand for Managerial Decision Making
This is because when buyers become aware of a shift in income, they will change their preferences and expectations for such products. The one most relevant to businesses, however, is the price elasticity of demand, which measures the change in demand as a result of a change in price. Income Elasticity of Demand : So long we have examined the responsiveness of changes in quantity demand to changes in price. This may affect advertising and other promotional activities. It conveys oral and visual messages that have designed for informing customers about the availability of the product and influencing and persuading them to purchase the products. As a result output may increase to such an extent that 100 unemployed workers or even more are reabsorbed by the firm.
Practical Applications of Price Elasticity of Demand
Staffs are also opposed to the use of automated devices for fear of unemployment. In this situation, public bus is an inferior good while the cab is a normal good. If, on the other hand, demand is highly elastic a reduction in price may cause total revenue to increase. For forecasting demand Income elasticity of demand can be used for predicting future demand of any goods and services in a case when manufacturers have knowledge of probable future income of the consumers. Factors That Affect Price Elasticity of Demand Availability of Substitutes The more easily a shopper can substitute one product for another, the more the price will fall.
Importance of Demand Elasticity in Business Economics
Formulation of Tax Policies The taxation policy of the government is also based on the elasticity of the products. Such examples could be multiplied. The coefficient of arc elasticity may be expressed as It may be noted that the demand for a particular commodity may be price elastic but income inelastic. ADVERTISEMENTS: The following points highlight the ten practical uses of concept of price elasticity of demand. The concept is also important to the economic planners of the country.
It is zero in case of unrelated goods like tractors and motor cars. Minimum Wage : In some countries the government has imposed minimum wage above the equilibrium level. Low price means large sales and, thus, large overall sales If demand is inelastic, high prices can be set. Apart from this, the products for whose income elasticity are negative beyond a specific level of revenue are termed as inferior goods. The separate pricing is very difficult in such cases or the separate cost of predication is not known in such type of joint product.
Use of Elasticity of Demand in Business Management Problems
This fall in price is unlikely to raise demand because consumption of stable agricultural crops remain more or less unchanged in all situations. Their main profits come from products in higher demand. In such a situation an increase in import prices will result in a more than proportionate fall in import volume, reducing the total amount of foreign currency required to finance the import bill, while the decrease in export prices results in a more than proportionate increase in export volume, bringing about an increase in total foreign currency earnings on exports. So its net profit will be Rs. . If there is a substantial change in wages, the change in demand for products will also be significant. However, if the good in question is considered a harmful one and has an elastic demand, then the government can deliberately levy a huge tax on it with the objective of reducing its consumption.
A business man has often to consider whether a lowering of price will lead to an increase in the demand for his product, and if so, to what extent and whether his profits would increase as a result thereof. In every case, elasticity measures the responsiveness of one factor—typically the quantity demanded or supplied of a good—relative to a percentage change in some other factor such as price or income. As a consequence, it will have to increase production and recruit more workers. However, application of the concept is possible only after calculation of an elasticity coefficient. The elasticity is 2. As a result, an increase in the output of wheat or jute due to good harvest or productivity rise due to technological progress may lead to a sharp fall in their prices.
Uses of Income Elasticity of Demand in Business Decision Making
Show that at any given price, the two curves have the same elasticity of demand. The income elasticity of demand is also determined by the ratio of the percentage variation in the market for a product to the percentage change in income. If the cross elasticity is infinite, the market structure is perfectly competitive. Knowledge about the nature of products is important to any producers in order to make further decisions related to the goods in the right manner. To understand this peculiar phenomenon we must learn an important economic concept, viz. Therefore, a firm finds that while determining the price of its product, it should take into account its elasticity of demand as well.
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