What is the importance of the concept of price elasticity to government, consumer and producers.

Government

• Helps government to regulate prices. I.e. In order to protect the interest of consumers’ government fixes the maximum price of the commodity with inelastic demands and those for export.
• Can be used by government to determine taxes on commodities.  Government can impose higher taxes on goods with inelastic demand whereas low rates of taxes imposed on commodities with elastic demand
• It helps government in currency devaluation. The government can devalue it currency if her imports and exports have elastic demand and supply such that as the prices of imports increase, quantity of imports reduce and as prices of exports reduce the volume of export increase.
• The concept of elasticity of demand enables the Government to decide as to which industry should be declared as public utility and consequently owned and controlled by the state. The products like electricity, gas, water, transportation, etc. have inelastic demand to avoid high prices to the nationals.
• Protection and subsidization. It helps the government in giving subsidies to producers. The producers whose products have elastic demand seek more protection and assistance from the government because they are unable to face strong competition whereas produce whose products have inelastic demand will get less subsidies from government.
• Wage policy. This helps the government when establishing wages of its workers. Workers with inelastic demand such as Doctors are paid more than those that have elastic demand are paid less e.g. office messengers, cleaners, drivers
• Gain in international Trade: The ‘terms of trade’ can be determined by measuring elasticity of demand in two countries for each other’s goods. In international trade, a country earns more profits by importing the commodities, which have high elastic demand and exporting the ones, which have relatively less elasticity.
• It applicable under the tariff policy. A tariff is a tax imposed on exports and imports of the country. tariffs are imposed on imports with the aim of  discouraging their importation and local consumption. Such a policy is only successful when the price elasticity of demand for imports is elastic.
• This measurement can be useful in predicting consumer behavior as well as forecasting major events, such as an economic recession or recovery.
• To address Paradox of poverty amidst plenty. Government can stabilize the prices of agricultural goods by following a policy of price support program in the event of increased production.
• To regulate consumption of harmful goods by high taxation.
• To reduce inflation. Government can levy taxes on products with inelastic demand to withdraw money from circulation

Consumer

• It helps in determining incidence of tax. For goods whose demand is elastic, the burden is borne by the producer and for those whose demand is inelastic; the burden is borne by the consumer.
• It is used to determine the expenditure of the consumers. Consumers spend more on commodities whose demand is inelastic such as soap and spend lend less on commodities whose demand is elastic
• Protection and subsidization. The government has a duty to protect its citizens from over exploitation by giving subsidies to essential commodities such as drugs and maintenance of roads.

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 a 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 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.