What is the relevance of the concept of price elasticity to government.
- 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.
- 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
- 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.
- 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
- This measurement can be useful in predicting consumer behavior as well as forecasting major events, such as an economic recession or recovery.
- 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.
- To address Paradox of poverty amidst plenty. Government can stabilise the prices of agricultural goods by following a policy of price support programme in the event of increased production.
- 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.
- 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
CATEGORIES Economics
TAGS Dr. Bbosa Science
