Uses and Importance of Elasticity
Some of the uses and importance of Elasticity are described below:
1. Product pricing: By evaluating the various degree of price elasticity of demand, it is easy to know whether a price cut is better or a price rises to increase the sales, or the total revenue and the profit. When the demand for the product is found unitary elastic, price change is ineffective in bringing more total revenue. So, unless the cost is charged it is not worthwhile to change the price.
2. Pricing of Input: The concept of price elasticity of demand is also useful to determine the prices of inputs. If the demand for the inputs is elastic, the producer is ready to prepare to offer a low price for the inputs. Similarly, they are ready to pay a high price for inelastic inputs.
3. Price of Joint Products: If two or more than two products are produced from the same investment or plant, they are called joint products. For example, a farmer produces meat and wool jointly from his sheep farming.
4. Demand Forecasting: To forecast the demand, price elasticity is helpful. Given the elasticity of demand and the state of the independent variable, it is possible to forecast the demand for a good.
5. To Trade Unionists: The concept of price elasticity is useful to trade union in wage bargaining. The union leader, when they find that demands for their industry’s product are fairly elastic, will bargain for a higher wage to workers and suggest the producer cut the price and increase sales which will compensate for his loss in total profit and vice-versa.
6. In Business Decision Making: The income elasticity of demand is applicable to take various decisions at the business level. They are long term business planning, market strategy, housing development strategies, etc.
7. To Formulate Business Policy: Cross elasticity helps certain businessmen to mold their business policies. For instance, edible oil producers may find the demand for the oil to be increased when the price of ghee rises. Likewise, sugar in relation to changes in the price of ghee.
8. To Classify Goods and Markets: Cross elasticity of demand is supposed to be important to classify the nature of goods and markets. If the cross-elasticity between two goods is positive, the two goods may be considered as substitutes of one another.
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