Illustrates the significance of elasticity

Question

Illustrates the significance of elasticity?

Answer 1

Significance of Elasticity is explained here with some important points:

The perception of elasticity of demand is more of practical importance:

1. Production: Producers usually decide their production level on the origin of demand for their product. Therefore elasticity of demand helps to fix the level of output.

2. Price fixation: Each seller under monopoly and imperfect competition has to take in account the elasticity of demand whereas fixing their price. When the demand for the product is inelastic then he can fix a higher price.

3. Distribution: Elasticity assists in the determination of rewards for factors of production. For illustration, when the demand for labour is inelastic, trade union can increase wages.

4. International trade: This perception helps in determining the terms of trade among two countries.
Terms of trade, means rate at that domestic commodity is exchanged for foreign commodities.

5. Public finance: It assists the government in formulating tax policies. To impose tax on a commodity, the government must take in consideration the demand elasticity.

6. Nationalization: Elasticity of demand assists the government to decide regarding nationalization of industries.

7. Price discrimination: A manufacture can fix a higher price for the product that have inelastic demand and lower price for product that have elastic demand.

8. Others: The notion elasticity of demand also assisting in taking other vital decision for example: finding out the price of joint product and take over decision.