1. Useful in taxation.
If it is the aim of the government to raise revenue it has to put into consideration elasticities of the commodities to be taxed, especially price elasticity of demand. In order to raise revenue the government has to impose heavy taxes on goods which have inelastic demand e.g. cigarettes and beer. This is because after taxes are imposed on such goods consumers will continue to demand the goods in large quantities as before and therefore the government is able to collect more revenue. On top of this, the burden of taxes on goods which have inelastic demand falls more on consumers because sellers are able to pass a greater part of the tax to the
consumers through high prices.
This leaves the production of such goods more or less un affected thus making it possible for the government to raise enough revenue. This is shown in the diagram below.
It can thus be said that when a commodity has inelastic demand it pays the government to tax that commodity heavily because the greatest part of the tax is met by consumers, thus leaving the production of that good more or less unaffected, hence enabling the
government to collect more revenue from that good.
2. Elasticity is important in international trade
Before a country devalues her currency so as to encourage export and discourage imports, it has to put into consideration the elasticity of demand and supply for her export and imports.
For devaluation to succeed, exports must be highly elastic so that after devaluation, greater quantities can be sold in the foreign market. Similarly, the export must have elastic supply in order to meet increased demand in foreign markets. On the import side, imports must have elastic demand so that after devaluation greater quantities of imports can be abandoned.
We can therefore say that before any country devalues her currency, it is important to consider elasticity of demand and supply for export and imports.
3. Elasticity also tells us the degree to which goods are related.
High cross elasticity between two commodities shows that the two commodities are very related. This is a useful concept especially for formulating pricing strategies. Such elasticity is especially important in studying how unfair competition of dumped goods affects performance of domestic industries. This would thus enable the government know how much import duty to impose on such goods as to protect local industries from collapsing.
The cobweb theory model is used to trace the path form disequilibrium to position of equilibrium. The concept of elasticity is useful in various ways namely:
- The relation of the goods
- Taxation.
- international trade
- Elasticity is the percentage change in the quantity supplied/demanded of a commodity resulting from a 1% change in price.
Faimus answered the question on
January 16, 2019 at 19:27