Some important points from which you can realize the important of price elasticity of demand! Price elasticity of demand is a very important concept. Its importance can be realized from the following points:
Determination of price policy: While fixing the price of this product, a businessman has to consider the elasticity of demand for the product. He should consider whether a lowering of price will stimulate demand for his product, and if so to what extent and whether his profits will also increase a result thereof.
If the increase in his sales is more than proportionate, to the reduction in price his total revenue will increase and his profits might be larger.
On the other hand, if increase in demand is less than proportionate to fall in price, his total revenue we will fall and his profits would be certainly less. Therefore, knowledge of elasticity of demand may help the businessman to make a decision whether to cut or increase the price of his product or to shift the burden of any additional cost of production on to the consumers by charging high price.
In general, for items having inelastic demand, the producer will fix a higher price and items whose demand is elastic the businessman will fix a lower price.
Price discrimination refers to the act of selling the technically same products at different prices to different section of consumers or in different in sub-markets.
The policy of price-discrimination is profitable to the monopolist when elasticity of demand for his product is different in different sub-markets. Those consumers whose demand is inelastic can be charged a higher price than those with more elastic demand.
Shifting of tax burden: To what extent a producer can shift the burden of indirect tax to the buyers by increasing price of his product depends upon the degree of elasticity of demand. If the demand is inelastic the larger part of the indirect tax can be shifted upon buyers by increasing price.
On the other hand if the demand is elastic than the burden of tax will be more on the producer. Taxation and subsidy policy: The government can impose higher taxes and collect more revenue if the demand for the commodity on which a tax is to be levied is inelastic.
On the other hand, in ease of a commodity with elastic demand high tax rates may fail to bring in the required revenue for the government. Importance in international trade: The concept of elasticity of demand is of crucial importance in many aspects of international trade. The success of the policy of devaluation to correct the adverse balance of payment depends upon the elasticity of demand for exports and imports of the country.
The policy of devaluation would be benificial when demand for exports and imports is price-elastic. A country will benefit from international trade when: The terms of trade between the two countries also depends upon the elasticity of demand of exports and imports of two countries.Price Elasticity of Demand Essay.
Price elasticity of demand In economics and business studies, the price elasticity of demand (PED) is an elasticity that measures the nature and degree of the relationship between changes in quantity demanded of a good and changes in its price.
Importance of income elasticity to firms Essay Sample. INTRODUCTION In any economy, the levels of incomes of the population determine the level of demand of commodities produced and made available in that economy.
There are generally three types of elasticity of demand, which are price, cross-price and income elasticity of demand. Explain The Concept Of Elasticity Of Demand Economics Essay. Print Reference this If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please click on.
Mathematically, price elasticity of demand is only the percent change in capacity divided by the percent change in cost. In this essay the following issues will be discussed and examples will be given.
To begin with Price Elasticity of Demand will be explained provided with illustrations. The concept of elasticity is of great importance to businessmen. When the demand of a good is elastic, they increases sale by towering its price. In case the demand' is inelastic, they are then in a position to charge higher price for a commodity.
The importance of Price elasticity of demand and Cross elasticity of demand 1. Price elasticity of demand (Ed) used to generate the revenue. It shows the percentage change in quantity demanded in response to a one percent change in price.