Question 26 of 29
Q.Explain the importance of price elasticity of demand.
Andhra Pradesh BieapBIEAP AP Intermediate (1st Year) Commerce Board 2024Subjective· 5mImportance★★★★★est
90% · 26/29 Questions
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Start your 14-day free trial to unlock the full solution →Price elasticity of demand shows how much quantity demanded changes when price changes. Its knowledge is useful to businessmen in pricing, to the government in taxation and public utility pricing, in wage fixation, in international trade, and in explaining situations like the farmer's poverty in a good harvest.
Meaning
Price elasticity of demand is the degree of responsiveness of quantity demanded of a good to a change in its price. It is measured as the percentage change in quantity demanded divided by the percentage change in price.
Importance of Price Elasticity of Demand
- Useful to the businessman in pricing — a monopolist charges a high price where demand is inelastic and a low price where demand is elastic, so as to maximise revenue.
- Useful to the government in taxation — heavy taxes are placed on goods with inelastic demand (like cigarettes and liquor) because consumers go on buying them, giving the government good revenue.
- Useful in deciding subsidies and public utility prices — prices of essential services with inelastic demand (water, electricity) are fixed keeping elasticity in mind.
- Helpful in the theory of distribution — the reward of a factor of production depends partly on the elasticity of demand for that factor; a trade union can raise wages more where demand for labour is inelastic.
- Explains the paradox of poverty amid plenty — because the demand for food grains is inelastic, a bumper harvest lowers prices sharply and reduces farmers' incomes. …
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