Q.Discuss the practical importance (business and economic uses) of the concept of price elasticity of demand.

Elasticity turns the direction given by the Law of Demand into the magnitude that real decisions require.

Price elasticity is one of the most widely used ideas in applied economics because it tells decision-makers how much quantity will respond to a price change. Its main uses:

• Pricing and revenue decisions. For an elastic good, cutting price raises total revenue; for an inelastic good, raising price raises revenue. A seller must know elasticity before changing price.
• Price discrimination. A monopolist charges a higher price in the inelastic market and a lower price in the elastic one — e.g. peak vs off-peak fares.
• Government taxation. Indirect taxes are placed heavily on inelastic goods (petrol, tobacco, liquor) so that revenue stays high despite the tax.
• Wage/factor pricing. Workers producing goods with inelastic demand can bargain for higher wages more easily, since higher costs can be passed on.
• International trade and terms of trade. Elasticity of world demand guides export pricing, devaluation and tariff decisions. …

Giving only the pricing use and omitting taxation, discrimination and trade; recommending a price cut for an inelastic good (it would lower …