Importance of Elasticity of Demand

Importance of Elasticity of Demand

The concept of elasticity of demand is of much practical importance.

1.        Price fixation: Each seller under monopoly and imperfect competition has to take into account elasticity of demand while fixing the price for his product. If the demand for the product is inelastic, he can fix a higher price.

2.        Production: Producers generally decide their production level on the basis of demand for the product.

3.        Distribution: Elasticity of demand also helps in the determination of rewards for factors of production.

4.        International trade: Elasticity of demand helps in finding out the terms of trade between two countries. Terms of trade depends upon the elasticity of demand for the goods of the two countries.

5.        Public finance: Elasticity of demand helps the government in formulating tax policies. For example, for imposing tax on a commodity.

6.        Nationalization: The concept of elasticity of demand enables the government to decide over nationalization of industries.