Price Elasicity and Income Elasticity of Demand

Topics: Price elasticity of demand, Supply and demand, Elasticity Pages: 3 (751 words) Published: August 6, 2013
Q 1. Discuss the practical application of Price elasticity and Income elasticity of demand.

Ans: There are many practical applications of price elasticity and Income elasticity of demand which are discussed as below. (A) Practical application of price elasticity of demand :
1.Production planning: It helps a producer to decide about the volume of production. When the demand is elastic, a producer has to produce different quantity of product and fixed quantity when the demand is inelastic. 2.It helps in fixing the prices of different goods: When the demand is elastic, the producer will change the price of the product according to change of demand and will approach the price decrease policy. Similarly when the price is in-elastic the producer will keep the price of the product fixed and will approach price-increase police. Similarly it helps a monopolist to practise price discrimination on the basis of elasticity of demand. 3.It helps in fixing the rewards for factor inputs: The producer determines the rewards for factor inputs of the product according to the elasticity nature of the demand. Producer pays higher rewards for inelastic demand of any factor unit and lower rewards for elastic demand. 4.It helps in determining the foreign exchange rates: The rate of foreign exchange between the counties is also governed by the pattern of demand of international currency in any particular country. i.e if demand is inelastic then the exchange rate is higher and vice versa. 5. also decides the rate of term of trade of commodities between two countries. i.e if the demand of product of any country in other country is inelastic then the receiving country has to pay more terms to the country from where the product is received in terms of its commodities for any unit of receiving commodity to that country and vice versa. 6.It helps in fixing the rate of taxes: It helps the government in any state / country to fix the taxes on goods. If the demand of any goods in...
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