Importance of elasticity of demand in business decisions. Role of price elasticity in business decision 2019-02-23

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Importance Of Cross Elasticity Of Demand Free Essays

importance of elasticity of demand in business decisions

On the contrary, if the demand for a commodity is perfectly elastic, the imposition of the tax on it will not cause any rise in price and, therefore, the whole burden of the tax will be borne by the manufacturers or sellers. Further, taxes on commodities having elastic demand will not yield much revenue to the Government as the demand for such commodities will fall significantly with an increase in their prices. Arc elasticity, Coffee, Elasticity 1730 Words 5 Pages University, Manipal Analysis on Price Elasticity of Demand Abstract The price elasticity of demand is a factor for an industry, which is existing and the ones emerging in the market, of what is to be the price of the product; considering the demand of the same in the market and whether or not to increase the price to make any more profit sacrificing a marginal amount of sales or a shortfall in the revenue. International Trade: The concept of elasticity of demand also plays a significant role in the international trade or the terms of trade. When elasticity is less than infinity, say 3, as is found under imperfect competition and monopoly, price would be greater than marginal cost. Therefore, the consumers will bear the whole burden of the tax in the form of higher price they pay for the same quantity demanded. This paradox is easily explained by the inelastic nature of demand for most farm products.

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Significance of Price Elasticity of Demand

importance of elasticity of demand in business decisions

In such cases concept of elasticity of demand help the management to pacify the trade unions. Downey, who targets the strategies, goals and revenue targets has steered DigiVal for the past 12 years. A positive coefficient, particularly if it is greater than unity, suggest that current price increase may shift the demand function to the right, which may result in the same or greater sales at the higher prices while consumers try to beat the expected price increases by building up stocks. Thus, the attempt by the trade union to raise wages will cause unemployment among the workers. The elasticity of coffee must be inelastic. This is called the paradox of poverty amidst plenty, as poor people get less prices with almost same demand due to excess supply. A change in wage would make an impact on the firms employment.

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What is the importance of income elasticity of demand?

importance of elasticity of demand in business decisions

If the demand for a good is more in response to changes in other economic factors, companies must use caution when raising prices. While deciding it,price elasticity of demand becomes important for him. The degree of change in the demand for one product as a response to a change in the price of a different product. Some people can cut back our leisure driving, or carpool, or take public transit - but others cannot. Then I will follow up by explaining my reasoning and interpreting my results. With more research about operations, managers can choosethe best alternatives presented to them. This is important, as in Economics, resources are scarce, it's unwise to use resources and the final outcome is not achieved.

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Role of price elasticity in business decision

importance of elasticity of demand in business decisions

Elasticity The effects of changes in supply and demand are not always proportional. He should consider whether a lowering of price will stimulate demand for his product, and if so to what extent and whether his profits will also increase a result thereof. Income elasticity is when income affects demand. An elasticity equal to one is said to be unit elastic; that is, any change in price is matched by a change in quantity demanded. Arc elasticity, Consumer theory, Cross elasticity of demand 860 Words 5 Pages Managerial Economics Research Report: The Price Elasticity of Demand The Price Elasticity of Demand: 1. Cross elasticity of demand is denoted by Exy and is mathematically represented as Cross elasticity of demand is one of the major tools that businessmen producers take help from in order to make correct business decisions. As a result, all economic decisions by the government, business firms, investors, and consumers, etc.


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Importance of the Concept of Elasticity of Demand

importance of elasticity of demand in business decisions

Importance in fiscal policy: The elasticity of demand is also of great significance in the field of fiscal policy. In the market with elastic demand for his commodity, the discriminating monopolist fixes a low price and in the market with less elastic demand, he charges a high price. The firms can make different arrangements to increase or reduce production or push up sales on the basis of sales forecast. This imbalance will cause the market price to rise or fall as needed until the quantities are equal. Theoretical Importance : The concept of elasticity of demand has also a great theoretical importance. It occurs because of global weather patterns and topography. However, if the good in question is considered a harmful one and has an elastic demand, then the government can deliberately levy a huge tax on it with the objective of reducing its consumption.

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What is the Importance of Elasticity of Demand?

importance of elasticity of demand in business decisions

Thus, the policy adopted is to charge a slightly lower price for items whose demand is relatively elastic and the costs are covered by increased sales. The Government: The concept of elasticity demand is of great use to the government in formulating its revenue-collecting and welfare policies. In this case, it can improve its balance of trade without unduly weakening its rate of exchange. For a high elasticity, prices should approach equilibrium because straying from equilibrium results in a higher change in demand than in price. When demand is neither perfectly inelastic, nor perfectly elastic, then respective burdens borne by the consumers and the producers will depend upon the elasticity of demand as well as on the elasticity of supply. The elasticity of demand also determines to what extent a tax on commodity can be shifted to the consumer.

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Significance of Price Elasticity of Demand

importance of elasticity of demand in business decisions

The alorithms generate the decision which is subsequently implemented managerial action program. Thus, instead of gaining from the increase in price, it will lose if the demand for a product happens to be elastic. Peak and off-peak demand - demand tends to be price inelastic at peak times and more elastic at off-peak times. The sample data included one dependent variable Y Quantity demanded and three independent variables X1 price of pizza X2 Tuition X3 Price of Soft drinks and 4. Arc elasticity, Consumer theory, Elasticity 2882 Words 10 Pages record levels at times and to stay high for extended periods of time. Besides the practical importance of the concept of elasticity of demand, it has theoretical importance also.

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Use of Cross Elasticity of Demand in Business Decision Making

importance of elasticity of demand in business decisions

Priceelasticity of demand for a taxed product plays key role in determining the impact of tax increase on government revenue. The tastes and preferences of consumers change; new methods of distribution are developed; consumers become more aware of pricing information. These variations in volume and price affect market stability. He specializes in technology and communications. Variations in a companies sales are likely to be related to variation in product prices,consumers,incomes,tastes and preference's multiple regression analysis can be used to in … vestigate the nature of this relationship and correlation analysis can be used to test the goodness of fit. Thus in perfect competition, the firm is a price taker. As a result of the imposition of a sales tax per unit of the commodity, supply curve will shift upward to S 2and will be parallel to the supply curve S, without a tax.

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What is the importance of income elasticity of demand?

importance of elasticity of demand in business decisions

Thus, elasticities differ with respect to variety of product in question. Maximum profit does not necessarily result from selling goods at the highest possible profit margins. Things become more complicated, however, after introducing costs. Such type of response can be observed in substitute goods such as Coke and Pepsi. Firms need to consider the elasticity of demand and, using this, determine.

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