ELASTICITY OF DEMAND: IMPORTANCE AND SIGNIFICANCE



 Both producers and policymakers can benefit greatly from understanding the idea of flexibility. Determining the degree of a price increase or drop in order to achieve a desired change in the quantity requested for the goods and services in the company or the economy is a highly useful tool. The following application will demonstrate the concept's practical importance.

1. Price fixation: An understanding of demand elasticity may aid a businessperson in deciding whether to lower or raise the price of his product or to pass along any additional manufacturing costs to customers by charging a high price. Under conditions of monopoly and imperfect competition, each vendor must consider the elasticity of demand when determining the price for his or her offering. He may set a higher price if there is an inflexible demand for the good.

2. Production: A businessperson can decide on production with the help of demand elasticity. The elasticity of demand for diverse products helps a businessman select the best product combination. The trader prefers the goods with more elastic demand. Increased sales of these goods are possible with a small price cut. Therefore, the elasticity of demand aids producers in making informed decisions about the volume of output to be generated.

3. Prices of production inputs: A factor with an inelastic demand can always be sold for more money than a factor with an elastic demand. The trade unions benefit from understanding where they may simply boost the wage rate. The ability of trade unions to bargain depends on how elastic the market for employees' services is. Demand elasticity aids in determining the compensation for production inputs. For instance, trade unions will be successful in raising salaries if the demand for labor is inelastic. It is applied to additional production factors.

4. International Trade: Demand elasticity is useful in determining the trade terms between two nations. The rate at which domestic goods are exchanged for foreign goods is referred to as the terms of commerce. The elasticity of demand for each other's goods by the two countries determines the trade terms. A nation will profit from international commerce if it sets lower export prices for goods with elastic demand and higher export prices for those with inelastic demand. Import demand ought to be inelastic during price increases and elastic during price decreases. The elasticity of export and import demand affects the terms of commerce between the two nations. The terms of trade will favor the seller country if the demand is inelastic. The conditions of trade will favor the buying country if the demand is elastic.

5. Tax regulations: If the demand for the good that will be subject to a tax is inelastic, the government can apply greater taxes and raise more money. On the other hand, high tax rates may not be able to provide the government with the necessary amount of money in the event of a good with elastic demand. Demand elasticity aids the government in developing tax laws. For instance, the Finance Minister must consider the elasticity of demand when placing a tax on a particular commodity.

6. Nationalization of public utilities: The nationalization of public utility services can also be justified with the help of elasticity of demand. Demand for public utilities such as electricity, water supply, post and telegraph, public transportation etc., is generally inelastic in nature. If the operation of such utilities is left in the hands of private individuals, they may exploit the consumers by charging high prices. Therefore, in the interest of general public, the government owns and runs such services. 

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