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
- Briefly discuss the factors which affect the own price elasticity of demand(Solved)
Briefly discuss the factors which affect the own price elasticity of demand
Date posted: February 4, 2019. Answers (1)
- What are the major consequences of each of the price control measures?(Solved)
What are the major consequences of each of the price control measures?
Date posted: February 4, 2019. Answers (1)
- With the aid of well-labeled diagrams, distinguish between price floors and
price ceilings.(Solved)
With the aid of well-labeled diagrams, distinguish between price floors and
price ceilings.
Date posted: February 4, 2019. Answers (1)
- Explain the circumstances under which price control is considered necessary.(Solved)
Explain the circumstances under which price control is considered necessary.
Date posted: February 4, 2019. Answers (1)
- Give the meaning of the term "Price Control"(Solved)
Give the meaning of the term "Price Control"
Date posted: February 4, 2019. Answers (1)
- Using the following demand and supply functions of a commodity x,
Qd = 100 - 2P
Qs = 40 + 4P
use diagrams to illustrate and explain the...(Solved)
Using the following demand and supply functions of a commodity x,
Qd = 100 - 2P
Qs = 40 + 4P
use diagrams to illustrate and explain the effects on the values from:
1. A fall in price of x's substitute
2. A simultaneous increase in input prices and a rise in the consumer's income
Ceteris paribus.
Date posted: February 4, 2019. Answers (1)
- Using the following demand and supply functions of a commodity x, compute the equilibrium price and
quantity.
Qd = 100 - 2P
Qs = 40 + 4P(Solved)
Using the following demand and supply functions of a commodity x, compute the equilibrium price and
quantity.
Qd = 100 - 2P
Qs = 40 + 4P
Date posted: February 4, 2019. Answers (1)
- Write short notes on Market Equilibrium.(Solved)
Write short notes on Market Equilibrium.
Date posted: February 4, 2019. Answers (1)
- The table below shows the demand and supply schedules for a product.
Required:
Plot the demand and supply curves and determine the equilibrium price and quantity(Solved)
The table below shows the demand and supply schedules for a product.
Required:
Plot the demand and supply curves and determine the equilibrium price and quantity
Date posted: February 4, 2019. Answers (1)
- State and briefly explain any four main factors that may cause a fall in the supply of a good in the
market.(Solved)
State and briefly explain any four main factors that may cause a fall in the supply of a good in the
market.
Date posted: February 4, 2019. Answers (1)
- Clearly explain the distinction between supply, demand and equilibrium price.(Solved)
Clearly explain the distinction between supply, demand and equilibrium price.
Date posted: February 4, 2019. Answers (1)
- What factors limit consumer sovereignty?(Solved)
What factors limit consumer sovereignty?
Date posted: February 4, 2019. Answers (1)
- Why is the consumer said to be sovereign?(Solved)
Why is the consumer said to be sovereign?
Date posted: February 4, 2019. Answers (1)
- Using specific examples, explain "Ceteris Paribus" as used in economics(Solved)
Using specific examples, explain „Ceteris Paribus‟ as used in economics
Date posted: February 4, 2019. Answers (1)
- Write short notes on Positive and normative economics(Solved)
Write short notes on Positive and normative economics.
Date posted: February 4, 2019. Answers (1)
- Write short notes on production possibility curve(Solved)
Write short notes on production possibility curve
Date posted: February 4, 2019. Answers (1)
- Write short notes on opportunity cost(Solved)
Write short notes on opportunity cost.
Date posted: February 4, 2019. Answers (1)
- Write short notes on Scarcity and Choice(Solved)
Write short notes on Scarcity and Choice.
Date posted: February 4, 2019. Answers (1)