Economics_recover.docx

Balbiran, Alyssa Joy L. 1BSA1 1. Importance and application of Demand Elasticity 

Importance a) International trade: In order to fix prices of the goods to be exported, it is important to have knowledge about the elasticity’s of demand for such goods.A country may fix higher prices for the products with inelastic demand. However, if demand for such goods in the importing country is elastic, then the exporting country will have to fix lower prices. b) Formulation of Government Policies:The concept of price elasticity of demand is important for formulating government policies, especially the taxation policy. Government can impose higher taxes on goods with inelastic demand, whereas, low rates of taxes are imposed on commodities with elastic demand. c) Factor Pricing:Price elasticity of demand helps in determining price to be paid to the factors of production. Share of each factor in the national product is determined in proportion to its demand in the productive activity. If demand for a particular factor is inelastic as compared to the other factors, then it will attract more rewards . d) Decisions of Monopolist:A monopolist considers the nature of demand while fixing price of his product. If demand for the product is elastic, then he will fix low price. However, if demand is inelastic, then he is in a position to fix a high price. e) Paradox of poverty amidst plenty:A bumper crop, instead of bringing prosperity to farmers, brings poverty. This is called the paradox of poverty amidst plenty. It happens due to inelastic demand for most of the agricultural products. When supply of crops increases as a result of rich harvest, their prices drastically fall due to inelastic demand. As a result, their total income goes down.

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Application

It is important for public managers as well as the agriculture business to decide what kind of crops shall help their revenue. 2. Almost every pack of cigarette contains some symbol or photo to make smoking distasteful for the viewers. But the maximum impact is brought by huge taxation. The public managers see the inelasticity in demand for cigarettes, so they find it useful to raise huge taxes. 3. Measurement of price elasticity of demand helps the public managers to fix minimum wages to make it beneficial for the both as well as the labor. 4. The Excise department can raise more revenue by selling ‘vanity number plates’ to the consumers.

5. The price elasticity of demand also helps us to see what substitutes can reduce demand of a competitive product. 6. The Excise department can raise more revenue by selling ‘vanity number plates’ to the consumers. 7. The price elasticity of demand helps the monopolist most to fix prices of the products which are inelastic or relatively inelastic to maximize his profits. 8. The price elasticity of demand also helps us to see what substitutes can reduce demand of a competitive product.

2. Importance and application of Supply Elasticity  Importance • The concept is helpful in taking Business Decisions. • Importance of the concept in formatting Tax Policy of the government. • For determining the rewards of the Factors of Production. • To determine the Terms of Trades Between Two countries. 

Application a) Availability of raw materials - For example, availability may cap the amount of gold that can be produced in a country regardless of price. Likewise, the price of Van Gogh paintings is unlikely to affect their supply.[2] b) Length and complexity of production - Much depends on the complexity of the production process. Textile production is relatively simple. The labor is largely unskilled and production facilities are little more than buildings – no special structures are needed. Thus the PES for textiles is elastic. On the other hand, the PES for specific types of motor vehicles is relatively inelastic. Auto manufacture is a multi-stage process that requires specialized equipment, skilled labor, a large suppliers network and large R&D costs.[3] c) Mobility of factors - If the factors of production are easily available and if a producer producing one good can switch their resources and put it towards the creation of a product in demand, then it can be said that the PES is relatively elastic. The inverse applies to this, to make it relatively inelastic. d) Time to respond - The more time a producer has to respond to price changes the more elastic the supply.[2][3] Supply is normally more elastic in the long run than in the short run for produced goods, since it is generally assumed that in the long run all factors of production can be utilised to increase supply, whereas in the short run only labor can be increased, and even then, changes may be prohibitively costly.[1] For example, a cotton farmer cannot immediately (i.e. in the short run) respond to an increase in the price of soybeans because of the time it would take to procure the necessary land. e) Inventories - A producer who has a supply of goods or available storage capacity can quickly increase supply to market. f) Spare or excess production capacity - A producer who has unused capacity can (and will) quickly respond to price changes in his market assuming that variable factors are readily available.[1] The existence of spare capacity within a firm, would be indicative

of more proportionate response in quantity supplied to changes in price (hence suggesting price elasticity). It indicates that the producer would be able to utilise spare factor markets (factors of production) at its disposal and hence respond to changes in demand to match with supply. The greater the extent of spare production capacity, the quicker suppliers can respond to price changes and hence the more price elastic the good/service would be.