Uses of price and income elasticity of demand, Microeconomics

Uses of price and income elasticity of demand:

The concept of price elasticity of demand has some uses whihc include the following:

(i) Pricing of goods and services

It is important that price elasticity of demand is considered in decisions to change prices of goods and services. If the demand for a good or service is elastic then to increase sales revenue, price should be reduced. On the other hand, if ademand is inelastic then to increase sales revenue, price should be increased.

(ii) Government taxation policy

Government imposes indirect taxes on goods and services to either raise revenue or discourage consuption of the good and service.Government pays attention to price elasticity of demand imposing indirect taxes on goods and services. If goverenment's aim is to raise revenue then goods and services with inelastic demand will be selected. On the other hand, if the aim is to discourage consumption then goods and services with inelastic demand will be selected.

(iii) Minimum wage policy

Minimum wage is usually fixed above the equilibrium market wage. This causes employers to demand less labour while supply of labour increases creating unemployment of labour. For minimum wage policy to succeed and cause less employment then demand for labour should be inelastic.

Posted Date: 1/2/2013 7:12:51 AM | Location : United States







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