Why it is important for the government and firms to know what the price elasticity of demand is?
Nowadays there are a lot of different factors in business world which influence on price changing.
The most important is elasticity of demand. So, elasticity of demand is kind of relationship between
a change in the quantity demanded of a particular good and a change in its price. The main
formula of price elasticity demand is: percentage of change in quantity demanded divided to
percentage of change in price. Usually this measure is presented on the graph with 2 measures
price and quantity, curves of elasticity are built obliquely. This simple knowledge is the main part of
the economics concepts.
To this knowledge appeal not only firms but also the government. So, why is it so important? First
of all, some points such as international trades, governmental policies and factor pricing. Lets look
through the first point. Different countries need to fix bigger prices with inelastic demand and
exporting countries will fix lower prices with elastic demand in importing country. Government also
is interested in price elasticity. If the demand for total product is non elastic, it will get more attracts
and incomes. Lets look through the cigarette company, if taxes on cigarette increase and also the
price increase, the main demand will be inelastic because people cant find another way how to get
nicotine into their body, they have no any choices, just to buy cigarettes. But if we look throughout
the example of apple production, of course the demand could be inelastic and elastic, it depends
on price of the products and quantity of interested in costumers, the most important factor here is
the recognition of brand. These 2 examples show us that elasticity of demand could be different
and this factor depends not only on price, but also on promotion, people needs and normal things
rate.
Finally, price elasticity if demand is important for city companies, world trade centre and also for
the government of each country. All conclusions in economics world start with the definition of
demands and can not exist with out this knowledge and calculation. This is also could be the best
way how to understand relationships between countries on exports and imports, and psychology of
each country.
Nowadays there are a lot of different factors in business world which influence on price changing.
The most important is elasticity of demand. So, elasticity of demand is kind of relationship between
a change in the quantity demanded of a particular good and a change in its price. The main
formula of price elasticity demand is: percentage of change in quantity demanded divided to
percentage of change in price. Usually this measure is presented on the graph with 2 measures
price and quantity, curves of elasticity are built obliquely. This simple knowledge is the main part of
the economics concepts.
To this knowledge appeal not only firms but also the government. So, why is it so important? First
of all, some points such as international trades, governmental policies and factor pricing. Lets look
through the first point. Different countries need to fix bigger prices with inelastic demand and
exporting countries will fix lower prices with elastic demand in importing country. Government also
is interested in price elasticity. If the demand for total product is non elastic, it will get more attracts
and incomes. Lets look through the cigarette company, if taxes on cigarette increase and also the
price increase, the main demand will be inelastic because people cant find another way how to get
nicotine into their body, they have no any choices, just to buy cigarettes. But if we look throughout
the example of apple production, of course the demand could be inelastic and elastic, it depends
on price of the products and quantity of interested in costumers, the most important factor here is
the recognition of brand. These 2 examples show us that elasticity of demand could be different
and this factor depends not only on price, but also on promotion, people needs and normal things
rate.
Finally, price elasticity if demand is important for city companies, world trade centre and also for
the government of each country. All conclusions in economics world start with the definition of
demands and can not exist with out this knowledge and calculation. This is also could be the best
way how to understand relationships between countries on exports and imports, and psychology of
each country.
