What Is The Importance Of Price Elasticity Of Demand

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2.2 Importance of price elasticity of demand
2.2.1 Pricing decisions The price elasticity of demand helps an organization to determine the price of its products in various circumstances.
a. Under Monopoly - Under monopolistic market conditions, the price of products is determined only on the basis of price elasticity of demand. In monopolistic market conditions, if the demand is elastic, the price is set very low for per unit of product. This results in high demand for the product due to low price. On the other hand, if the demand is inelastic, the price is set very high. The high price of a product with demand remaining the constant helps in generation the large revenue for an organization.
b. Price Discrimination - Refer to a situation when different prices are charged from different consumers. A monopolist charges more prices from consumers whose demand for products is inelastic. Implies that high prices are charged from consumers whose demand does not change with change in the price of products. …show more content…

The government takes into consideration the price elasticity of demand while planning taxes. For example, tax on products having elastic demand generates less revenue for the government as the taxes increase the price of products, which results in decrease in demand. On the contrary, a high rate of tax is levied on products having inelastic demand such as addictive products cigarettes, alcohols etc. Apart from this the government also considers the price elasticity of demand before implementing any price control policy.
3 Cross price elasticity of demand
The cross-price elasticity of demand shows the relationship between two goods or services. More specifically, it captures the responsiveness of the quantity demanded of one good to a change in price of another good. Cross-Price Elasticity of Demand (EA, B) is calculated with the following

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