Practical Importance of the knowledge of Price Elasticity of demand

The practical importance of the measures of elasticity of demand is to be appreciated in various ways:

1. From the point of view of individual consumers who tend to spend limited income on commodities with less elastic demand.
2. From the point of view of business person who need to know the effects that changes in price will have on the sales revenue. For instance, if they know that demand for their product is relatively inelastic then increasing prices might help them to increase revenue. If on the other hand they are aware that source of their products have a high price elasticity of demand they will be more cautious when considering price increases for fear of losing revenue.
3. From the point of view of firms in who may attempt to change the price elasticity of demand for their product through advertising, packaging, better service and other services to improve or help maintain sales.
4. From the point of view of business people who may also want to know the price elasticity of demand as purchasers of inputs for use in their business.
5. From the point of view of governments in trying to estimate the yield of a prospective market tax.
6. From the point of view of devaluation policy aimed at improving the balance of payments.
7. From the point of view of the effectiveness of price control and deregulation of some industries.
8. From the point of view of wage bargaining among workers and employers and the government when fixing minimum wage legislation.
9. For purposes of regulating farm incomes and to predict consequences of bumper harvests of crops.

Posted Date: 11/27/2012 6:36:41 AM | Location : United States

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