Page 43 - VIRANSH COACHING CLASSES

Importance of Elasticity of Demand : price as compared to those having elastic
The concept of elasticity of demand is of demand. For example, workers can ask for
great importance to producers, farmers, workers higher wages, if the demand for the product
and the Government. Lord Keynes considered produced by them is relatively inelastic.
this concept to be the most important contribution 4) Importance in Foreign Trade : The
of Alfred Marshall. Significance of the concept concept of elasticity of demand is useful to
becomes clear from the following applications :
determine terms and conditions in foreign
1) Importance to a Producer : Every producer trade. The countries exporting commodities
has to decide the price of his product at which for which demand is relatively inelastic can
he has to sell it. For this purpose, elasticity of raise their prices. For example, Organization
demand becomes important. If the demand of Petroleum Exporting Countries (OPEC)
for a product is relatively inelastic, he will fix have increased the price of oil several times.
up a higher price and vice-versa. The concept The concept is also useful in formulating
of elasticity of demand is also useful to a export and import policy of a country.

monopolist to practice price discrimination.
5) Public Utilities : In case of public utilities
2) Importance to Government : Taxation like railways which have an inelastic
policy of the Government is based on the demand, Government can either subsidise

concept of elasticity of demand. Those or nationalise them to avoid consumers
commodities whose demand is relatively exploitation.
inelastic will be taxed more because it will 6) Proportion of expenditure : If the
not affect their demand much and vice-versa.
proportion of expenditure in a person's
3) Important in Factor Pricing : The income is small, then demand for the product
concept of elasticity of demand is useful is relatively inelastic. For example, news

in determination of factor prices. The papers. If the proportion of expenditure
factor of production for which demand is is large, then demand for the product is
relatively inelastic can command a higher relatively elastic.

EXERCISE

Q. 1. Complete the following statements : a) perfectly elastic demand
1) Price elasticity of demand on a linear demand b) perfectly inelastic demand
curve at the X axis is ............... c) relatively elastic demand

a) zero b) one d) relatively inelastic demand
c) infinity d) less than one 4) When percentage change in quantity demanded

2) Price elasticity of demand on a linear demand is more than the percentage change in price, the
curve at the Y-axis is equal to ................. demand curve is ................
a) zero b) one a) flatter
c) infinity d) greater than one b) steeper
c) rectangular
3) Demand curve is parallel to X axis, in case of
d) horizontal
................
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