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i. Sales revenue
The concept of price elasticity of demand is important for a businessman in predicting the effect of
changes in price on sales revenue.
If demand is inelastic, revenue is increased by an increase in price and reduced by a fall in price. If
demand is elastic, revenue is increased by a fall in prices.
ii. Tax shifting
Tax shifting refers to the transfer of the money burden of taxation by the producer (on whom the tax is
imposed) to the consumer in form of increased product prices. The extent to which this can be done
depends on the price elasticity of demand of the commodity in question
iii. Consumption pattern
If the government wants to discourage the consumption of a particular commodity through
taxation, this policy will only be effective if the price elasticity of demand for the product is high. If price elasticity is high, the producer bears most of the tax burden and therefore reduces production. Similarly, the government can encourage consumption and production of inelastic demand goods by reducing taxes while increasing provision of subsidies.
iv. Devaluation
Price elasticity of demand is relevant in a country considering devaluation as a means of rectifying its balance of payment problems, that is, an unfavorable balance of payment position. Devaluation refers to the cheapening of the value of a country?s currency in terms of a foreign currency in a fixed
exchange rate regime/system. This would reduce export and increase import prices.
This would improve the balance of payment situation if the demand for both exports and imports is
highly price elastic since the quantity demanded would respond significantly to changes in price.
However, if the demand for both imports and exports is low, the balance of payments position would
not improve; thus if demand for both imports and exports is price inelastic, a country would not
consider devaluation as a means of rectifying (improving) its BOP position.
v. Protection policy
The concept of cross elasticity of demand is useful to the government in predicting the effects of its
protection policy; for example, if the government imposes a tariff on an imported commodity like
clothes with the intention of protecting the local industry, in this case textile industry, then the local and imported products must be close substitutes ( EX, is very high) for the government to achieve its objectives.
If the imported commodity is of a relatively higher quality, then the imposition of the tariff will not
achieve its end since people will still buy the imported products. The degree of substitutability is low.
vi. Competition and pricing
If a firm is in a competitive industry, there would be a high cross elasticity between its products
and those of other firms. For such a firm, it may be beneficial to lower prices in order to attract
consumers from other firms. This is because the price elasticity of demand for its products is very
elastic due to the availability of substitutes.
Wilfykil answered the question on February 4, 2019 at 12:32
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