Significance of Elasticity of demand

Significance of Elasticity of demand:

1. Price discrimination:

When the demand for a product has dissimilar elasticity’s in various markets, then the monopolist can fix various prices in various markets. This price discrimination is only possible due to distinct price elasticity.

2. Levy of taxes:

The government will obtain higher revenue when tax is raised on goods containing inelastic demand. On the contrary, the government will obtain lower revenue when tax is raised on goods containing elastic demand.

3. International Trade:

Terms of trade refer to the rate at which the domestic commodities are swapped for foreign commodities. The terms of trade will be favorable to a country when its exports take pleasure in inelastic demand in global market.

4. Determination of volume of output:

Volume of goods and services should be generated in accordance with the demand for commodity. Whenever the demand is inelastic, the producer will generate more goods to take the benefit of higher prices. Therefore the nature of elastic and inelastic demand aids in the determination of the volume of yield.

5. Fixation of wages for laborers:

When the demand for workers is inelastic, hard work of trade unions to increase earnings of the workers will be booming. On other hand, when the demand for labor is elastic, they might not succeed in raising the salary rate by trade union activity.

6. Poverty in the midst of plenty:

The notion of elasticity of demand elucidates the paradox of poverty that is, poverty in the midst of abundance. For illustration, bumper crop of food grains must bring agricultural prosperity however when the demand for food grains is inelastic, the agriculturist will be the loser when low price is compensated.

 

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