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Unit-6: Theory of Demand and Elasticity of Demand

6.22 Importance of Price Elasticity of Demand Notes

Following are the theoretical and practical importance of price Elasticity of Demand—
1. Determination of price Under Monopoly: Monopolist can alert on Elasticity of Demand of this
object If –
(i) Demand is elastic then Monopolist will keep low price, sell will increase on keeping low price
and total income will be maximum.
(ii) If demand is non-elastic then Monopolist will keep price high. With the increase in price sale
of that object will be minimum but total revenue got from it will be high.
2. Price Discrimination: When Monopolist sells to different buyers in different prices, then this situation
is called Price Discrimination. Monopolist can initiate the policy on price discrimination when elasticity
of demand of any objects is different for different uses for different consumers. He will take more
price from consumer for these objects whose demand are non-elastic and take less price from them
whose demand of that object is elastic. For example, demand of electricity for a person is non-elastic
so electric supplier takes more price for electricity for house consumer. In opposition of this, demand
of electric for a industry is elasticity. If price of electric is high then industry can use oil, diesel or coal
for their machines in place of electric. So electric supplier/ Board takes low price from industry.
3. Price Determination of Joint Supply: Joint Supply objects are those whose production is done
simultaneously, i.e., cotton and binola, oil and khal etc. To determine price of these objects, elasticity
of demand is kept in mind. For example, if demand of cotton is non-elastic and in respect of it demand
of binola is elastic then price of cotton will determine high and price of binola will be less.
4. Taxation Policy: Finance minister keeps in mind Elasticity of Demand to regular new taxation policy
(i) reduced income in place of increasing to regular more taxation on those objects which have elasticity
of demand. That is why on regulation of more tax on that object, price will be increased. Due to
increase in price, demand would be reduced. (ii) The goods which are non-elastic, finance minister
can increase price more but there is no more affect on demand so, income tax will get more.
5. Distribution of Burden of Taxation: By price elasticity of demand, it can be fixed like sales tax,
production tax etc. whole how much affect a consumer and procedure of non-elasticity Demand of
a object than indirect tax would affect more on consumer. Due to these tax prices object will be in
demand but there will very less reduction in demand but there will very less reduction in demand.
Opposite to it, if elasticity on indirect tax is relatively less consumers will bear the burden of indirect
taxes.
6. International Trade: There is great importance of conception of elasticity demand in international
trade. One country will get income after these important objects has non-elastic demand. If importing
country has elastic demand of these objects then exporting country will reduce price of their exported
object and will increase total export and will take advantage by this process. Like this a country will
import on less process of those objects whose demand has elasticity.
7. Paradox of Poverty: People, who are related to agriculture are well familiar that even after good
product of many agricultural products, income in money is less. It means that there is less income
after more production. This unnatural condition is called paradox of poverty. It is because that
maximum agriculture product has elastic demand. When these goods get low price after increasing
product then demand of them has not increased. That is why income by selling these saved is low.

6.23 Summary

• These days the concept of Elasticity of Demand is very much important for producers. To increase their
income, they should reduce the price of their product on that time when the elasticity of demand is

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