PRACTICAL APPLICATION (OR) IMPORTANCE (OR) SIGNIFICANCE OF ELASTICITY OF DEMAND
i. Taxation: The tax will no doubt raises the prices but the demand being in elastic, people must continue to buy the same quantity o f the commodity. Thus the demand will not decrease.
ii. Monopoly prices: In the same manner, the b usinessman, especially if he is a monopolist, will have to consider the nature of demand while fixing his price. In case I is in elastic, it will pay him to him to change a higher price and sell a smaller quantity. If, on the other hand, the demand is elastic he will lower the prices, stimulate demand and thus maximize his monopoly net revenue
iii. Joint products: In such cases separate costs are not ascertainable the producers will be guided mostly b y demand and its nature fixing his price. The transport authorities fix their rates accordingtothisprinciplewhenwesaythatheychargewhatthe?trafficwilbear'
iv. Increasing returns: W hen an industry is subject to increasing returns the manufacturer lowers the price4 to develop the market so that he may be able to produce more and take full advantage of the economies of large scale production.
v. Output: Elasticity o f demand affects industrial output reduction in price will certainly increases the sale in the market as a whole.
vi. Wages: Easticity of demand also exerts its influence on wages. If demand for a particular type of labour is relatively inelastic, it is easy to raise wages, but not otherwise.
vii. Poverty in plenty: The concept of elasticity explains the paradox of poverty in the midst of
plenty. This is specially so if prod uce is perishable. A rich harvest ma y actually fetch less money a poor one.
viii.Effect on the economy: The working of the economy in general is affected b y the nature of consumer demand. It affects the total volume of goods and services prod uced in the country.
Italso affectsproducers'demandfordiffernt factorsofproductiontheiralocationand remuneration.
Ix Economies policies: Modern governments regulate output and prices. The government can create public utilities where demand is inelastic and monopoly element is present.
x. Inte rnational trade: The nature of d emand for the internationally traded goods is helpful in determining the quantum of again of gain accruing to the respective countries. Thus is how it determines the terms of trade.
xi. Price dete rminatio n: The concept of elasticity o f demand is used in explaining the determination of price under various market conditions.
xii.Rate of foreign exchange: With fixing the rate o f exchange, the government has to consider the elasticity or otherwise of its imports and exports.
xiii.Relation between price elasticity average revenue and marginal revenue: This relationship enables us to understand and co mpare the conditions of equilibrium under different market conditions.
xiv. Price determinatio n: Price determination is forced to be profitable if elasticity o f demand in another. The monopolist can charge a higher price in the market where elasticity o f demand is less and a lower price where elasticity of demand is greater
xv. Measuring degree of monopoly powe r: The less is the elasticity of demand higher will be the price and wider the difference between the marginal cost and greater the monopoly power, and vice versa.
xvi. Classification of goods as substitutes and complements: Goods are classified as substitutes on the basis of cross elasticity. Two commodities may be considered as substitutes if cross elasticity is positive and complements when elasticity is negative.
xvii. Boundary between industries: Cross elasticity of demand is also useful in indicating boundaries between industries. Goods with highcroselasticity's constitute one industry, where as goods with lower elasticity constitute different industries.
xviii. Market forms: The concept of cross elasticity help[s to understand different market forms infinite cross elastic ity indicates perfect market forms infinite cross elasticity indicates perfect competitions, where as zero or hear zero elasticity indicates pure monopoly and high elasticity indicates imperfect competition
xix. Incidence of taxes: The concept of elasticity o f demand is used in explaining the incidence of indirect taxes like sales tax and excise duty. less is the elasticity of demand higher the incidence, and vice versa. In case of inelastic demand the consumer have to buy the commodity and must bear the tax.
xx. Theory of distribution: Elasticity of demand is useful in the determination of relative shares of the various factors determination of relative shares of the various factors of production is loss elastic, its share in the national dividend is higher, and vice versa. If elasticity of substitution is high the share will be low.