What is the importance of price elasticity of demand to the producer?
- It helps a producer in determining prices for his commodities. If a commodity has elastic demand, the producer will reduce the price and charge high price for a commodity that has inelastic demand
- It helps the producer in determining wages of his workers. Workers whose demand is inelastic are paid more than those whose demand is elastic
- It helps monopolists in price discrimination. A monopolist will charge high price for same for commodity where prices are inelastic and less price are elastic price.
- It helps a producer to determine advertisement costs. If a commodity has inelastic demand, the producer tends to spend less on advertisement and spends more on advertisement of commodities that have elastic demand because of stiff competition.
- In the Determination of Output Level: For making production profitable, it is essential that the quantity of goods and services should be produced corresponding to the demand for that product. Since the changes in demand is due to the change in price, the knowledge of elasticity of demand is necessary for determining the output level
- In Demand Forecasting: The elasticity of demand is the basis of demand forecasting. The knowledge of income elasticity is essential for demand forecasting of producible goods in future. Long- term production planning and management depend more on the income elasticity because management can know the effect of changing income levels on the demand for his product.
- Making decisions on what to produce. A businessman chooses the optimum product- mix on the basis of price elasticity of demand for various products. The products having more elastic demand are preferred by the businessmen. The sale of such products can be increased with a little reduction in their prices.
- Shifting of tax burden:e. if the demand is inelastic the larger part of the indirect tax can be shifted upon buyers by increasing price. On the other hand if the demand is elastic the burden of tax will be more on the producer
- Wage discrimination; worker who have elastic demand such as causal workers are paid less than workers with inelastic demand such as doctors.
CATEGORIES Economics
TAGS Dr. Bbosa Science
