Meaning of Economics-

The branch of knowledge concerned with the production, consumption,

and transfer of wealth. Economics is a social science concerned with the factors
that determine the production, distribution, and consumption of goods and
services. 'Political economy' was the earlier name for the subject, but economists
in the late 19th century suggested "economics" as a shorter term for "economic
science" to establish itself as a separate discipline outside of political science and
other social sciences
Economics is the study of the production and consumption of goods and
the transfer of wealth to produce and obtain those goods. Economics explains
how people interact within markets to get what they want or accomplish certain
goals. Since economics is a driving force of human interaction, studying it often
reveals why people and governments behave in particular ways.
The term economics is derived from the word “oeconomicus” by
Xenophon in 431 B.C. It is derived from two words economy and science.
Economy means proper utilization of resources. It means economics is the science
of economy or science of proper utilization of resources. It is comprised of
theories, laws, principle related to utilization of resources so as to solve the
economic problems, satisfy the human wants or need and so on
A study of economics can describe all aspects of a country’s economy, such
as how a country uses its resources, how much time laborers devote to work and
leisure, the outcome of investing in industries or financial products, the effect of
taxes on a population, and why businesses succeed or fail.
Adam Smith, known as the Father of Economics, established the first
modern economic theory, called the Classical School, in 1776. Smith believed that
people who acted in their own self-interest produced goods and wealth that
benefited all of society. He believed that governments should not restrict or
interfere in markets because they could regulate themselves and, thereby,
produce wealth at maximum efficiency. Classical theory forms the basis of
capitalism and is still prominent today.
A second theory known as Marxism states that capitalism will eventually
fail because factory owners and CEOs exploit labor to generate wealth for
themselves. Karl Marx, the theory’s namesake, believed that such exploitation
leads to social unrest and class conflict. To ensure social and economic stability,
he theorized, laborers should own and control the means of production. While
Marxism has been widely rejected in capitalistic societies, its description of
capitalism’s flaws remains relevant.
A more recent economic theory, the Keynesian School, describes how
governments can act within capitalistic economies to promote economic stability.
It calls for reduced taxes and increased government spending when the economy
becomes stagnant and increased taxes and reduced spending when the economy
becomes overly active. This theory strongly influences U.S. economic policy
today.As one can see, economics shapes the world. Through economics, people
and countries become wealthy. Because buying and selling are activities vital to
survival and success, studying economics can help one understand human
thought and behavior.

Nature and Scope of Economics

During the 19th century, the social sciences emerged and separate disciplines
were carved out. Economics, psychology, sociology, politics, anthropology and
other branches of social science developed as separate fields of study. In the last
part of the 19th century, “political economy” became “economics.” Since that
time, economics has been frequently defined as “the study of how scarce
resources are allocated to satisfy unlimited wants.” As a professional discipline,
economics is often regarded as a decision science that seeks optimal solutions to
technical allocation problems. In this text, economics is presented from two
perspectives. One perspective is the technical analysis of the processes by which
scarce resources are allocated for competing ends. An alternative perspective is
the social context of provisioning.
Economics as A Study Of The Allocation Of Scarce Resources
Economics as A Study Of Provisioning
. However, the economics is defined in different ways by different economists.
There are mainly three definitions of economics:-

Ø classical or wealth definition (Adam Smith)-1776 A.D

Ø neo-classical or welfare definition (Alfred Marshall )-1890 A.D
Ø modern or scarcity and choice definition (Lionel Robbins)-1932 A.D

Classical or wealth definition (Adam Smith)-1776 A.D

The famous classical economist Adam smith for the firs time defined
economics as “science of wealth”. The definition was given in the book “an
enquiry to the nature and the causes of wealth of nations” published in 1776 A.D.
the book is popularly known as “wealth of nations”. According to smith, labor is
the main source of income or wealth. More wealth is accumulated only if more
labor is used. Economics explains the human behavior and activities they do for
wealth. This definition was based upon the assumptions of full employment,
perfect competition, no governmental interventions, money just as a medium of
exchange and so on.
This definition has following main proposition:-
Ø economics is science of wealth
Ø Labor is the only source of income
Ø there is perfect competition in product as well as labor market
Ø the government should not interfere the activities of people and business
organizations
Ø This definition is influenced by physiocracy and mercantilism.

Criticism
Wealth definition has over emphasized wealth. Economics is science of
human activities rather than only wealth. Adam smith considers only material
things or wealth as subject matter of economics but human beings require some
immaterial things like self esteem or dignity, social prestige, national identity and
so on too. The immaterial things are called essential things for human satisfaction.
Wealth definition is based upon the theory of subsistence wage which is known as
iron law of wage. The law was against the workers and in favor of employers.
Adam smith doesn’t explain about scarcity of resource and choice of best
alternative for the use of resources. The problem of scarcity and choice is burning
issue in the modern economics but he fails to explain about the problems of
scarcity and choice. The wealth definition is based upon assumptions of full
employment and perfect competition but none of these two is in existence. This
definition is based upon the assumption of no intervention of government in
economic activities of people and business organization but we find in every
country more or less governmental intervention.

Neo-classical or welfare definition (Alfred Marshall)-1890 A.D

In 1890, Alfred Marshall, a famous neo-classical economist
and a great contributor to micro economics defined economics as the science of
material welfare. Here, the material welfare means the quantities of physical goods
consumed by people. If the people are consuming large quantities of goods, they
are said to have high level of welfare into two types
Ø material welfare
Ø immaterial welfare
According to him, only the material welfare is the subject matter of economics.
He assumes every person is rational and s/he uses the resources in his/her
possession very properly so as to maximize their own welfare. Economics is
therefore the science that studies the rational behavior revealed by the people.
Major propositions of Marshall’s welfare definition are:-
Ø Economics is science of material welfare
Ø Economics is social science i.e. science of mankind
Ø Economics is the study of rational behavior of people revealed for
maximization of material welfare.
Criticisms:-
This definition of economics a science of material welfare was assumed correct
until the arrival of Lionel Robbins. He criticized the definition under the following
aspects:-
Ø Classificatory activities of Marshall into material non material welfare,
economics and non economic goods is only classificatory not analytical
because single human cannot be material as well as non material according
to the nature and purpose of work.
Ø Non material activities like feeling of social service, human desire also
satisfy human needs. This idea has not been prioritized
Ø Non welfare consumption like harmful drugs, tobacco, and alcohol don’t
promote social welfare but still are in the study of economics
Ø Economics should study about total human beings but wealth definition
doesn’t study about isolated people like saints, nuns, monks etc.
Ø Modern or scarcity and choice definition (Lionel Robbins)-1932 A.D

Modern Theory
According to Lionel Robbins, economics is the science of scarcity of the resources
and the choice of best alternative for their utilization. The resources are limited in
supply. Each resource is usable for different purposes. The wants or need of people
are unlimited. The wants differ in importance. They differ from place to place,
from time to time and from person to person. Some wants are more important
whereas some are not. All wants cannot be fulfilled because of insufficiency of
resources. Therefore, we have to go on utilizing the resources in such a way, so
that, our more wants can be fulfilled leaving no one in most important wants
unfulfilled. For it, we must select best ways for the utilization of the resources. We
should have the complete information of resources available, needs of the country
and their importance and ways for the utilization of resources. This definition is
given in 1930 A.D after WWI. During third decade of the twentieth century, the
European countries were badly in need of large quantities of resources for
rehabilitation, construction of infrastructures, renovation etc. they were destructed
in war. This definition is both normative and positive in nature.

The major propositions are:-

Ø there is unlimited human needs or wants
Ø there is scarce means of resources
Ø there are alternative use of resources
Ø there is need of choice

Criticisms:
The definition is criticized in the following ways:-
Ø economic problems arises not only due to scarcity but due to under, miss or
over utilization of resources
Ø economic problems arises due to inequality too
Ø there is political consideration
Ø needs and resources may vary

Superiority of Robbins definition over Marshall’s definition:-

Ø the definition is scientific
Ø the definition is universally accepted
Ø the definition has wide scope
Ø the definition has science of choice

Meaning of Science, Engineering and Technology

Science- The word science comes from the Latin "scientia," meaning knowledge.
How do we define science? According to Webster's New Collegiate Dictionary, the
definition of science is "knowledge attained through study or practice," or
"knowledge covering general truths of the operation of general laws, esp. as
obtained and tested through scientific method [and] concerned with the physical
world."
What does that really mean? Science refers to a system of acquiring knowledge.
This system uses observation and experimentation to describe and explain natural
phenomena.
The term science also refers to the organized body of knowledge people have
gained using that system. Less formally, the word science often describes any
systematic field of study or the knowledge gained from it.

Ø a branch of knowledge or study dealing with a body of facts or truthssystem

atically arranged and showing the operation of general laws
Ø Systematic knowledge of the physical or material world gained throughobs
ervation and experimentation.
Ø Any of the branches of natural or physical science
Ø Systematized knowledge in general.
Ø Knowledge, as of facts or principles; knowledge gained by systematic
study.
Ø A particular branch of knowledge.
Ø Skill, especially reflecting a precise application of facts or principles,
proficiency.

Engineering - the branch of science and technology concerned with the design,
building, and use of engines, machines, and structures

Ø The art or science of making practical application of the knowledge of pure

sciences, as physics or chemistry, as in the construction of engines,
bridges, buildings, mines, ships, and chemical plants.
Ø The action, work, or profession of an engineer.
Ø Digital Technology. the art or process of designing and programming
computer systems: computer engineering;
Ø Skillful or artful contrivance; maneuvering.

Basically, to put it into simple terms, engineering is where you solve problems.
To add a bit more to it, engineers use technical, as well as scientific knowledge in
order to make judgments. By using their imaginations, they come up with
solutions to problems either new or old.It is by using the application of technical
and scientific knowledge that engineers put judgment, imagination and reasoning
to work in order to come up with new solutions to human problems or new ways
to solve old problems. So, if that has left you feeling a bit hazy, the best way to
summarize all of this is that engineers are problem solvers.

Technology
Ø The branch of knowledge that deals with the creation and use of technical
means and their interrelation with life, society, and the environment,
drawing upon such subjects as industrial arts, engineering, applied science,
and pure science.
Ø The application of this knowledge for practical ends.
Ø The terminology of an art, science, etc.; technical nomenclature.
Ø A scientific or industrial process, invention, method, or the like.
Ø The sum of the ways in which social groups provide themselves with the
material objects of their civilization.

Managerial Economics − Definition

A close interrelationship between management and economics had led to
the development of managerial economics. Economic analysis is required for
various concepts such as demand, profit, cost, and competition. In this way,
managerial economics is considered as economics applied to “problems of
choice’’ or alternatives and allocation of scarce resources by the firms.
Managerial economics is a discipline that combines economic theory with
managerial practice. It helps in covering the gap between the problems of logic
and the problems of policy. The subject offers powerful tools and techniques for
managerial policy making.
To quote Mansfield, “Managerial economics is concerned with the
application of economic concepts and economic analysis to the problems of
formulating rational managerial decisions.
Spencer and Siegelman have defined the subject as “the integration of
economic theory with business practice for the purpose of facilitating decision
making and forward planning by management.”
Nature and Scope of Managerial Economics
The most important function in managerial economics is decision-making. It
involves the complete course of selecting the most suitable action from two or
more alternatives. The primary function is to make the most profitable use of
resources which are limited such as labor, capital, land etc. A manager is very
careful while taking decisions as the future is uncertain; he ensures that the best
possible plans are made in the most effective manner to achieve the desired
objective which is profit maximization.

Ø Economic theory and economic analysis are used to solve the

problems of managerial economics.
Ø Economics basically comprises of two main divisions namely Micro
economics and Macro economics.

· Managerial economics covers both macroeconomics as well as

microeconomics, as both are equally important for decision making and
business analysis.
· Macroeconomics deals with the study of entire economy. It considers all
the factors such as government policies, business cycles, national income,
etc.
· Microeconomics includes the analysis of small individual units of economy
such as individual firms, individual industry, or a single individual
consumer.
All the economic theories, tools, and concepts are covered under the scope of
managerial economics to analyze the business environment. The scope of
managerial economics is a continual process, as it is a developing science.
Demand analysis and forecasting, profit management, and capital management
are also considered under the scope of managerial economics.

Demand Analysis and Forecasting

Demand analysis and forecasting involves huge amount of decision-making!
Demand estimation is an integral part of decision making, an assessment of
future sales helps in strengthening the market position and maximizing profit. In
managerial economics, demand analysis and forecasting holds a very important
place.
Profit Management
Success of a firm depends on its primary measure and that is profit. Firms are
operated to earn long term profit which is generally the reward for risk taking.
Appropriate planning and measuring profit is the most important and
challenging area of managerial economics.
Capital Management
Capital management involves planning and controlling of expenses. There are
many problems related to capital investments which involve considerable
amount of time and labor. Cost of capital and rate of return are important factors
of capital management.
Demand for Managerial Economics
The demand for this subject has increased post liberalization and globalization
period primarily because of increasing use of economic logic, concepts, tools and
theories in the decision making process of large multinationals.

Unit- 2
Demand Meaning-
Economists use the term demand to refer to the amount of some good or
service consumers are willing and able to purchase at each price. Demand is
based on needs and wants—a consumer may be able to differentiate between a
need and a want, but from an economist’s perspective they are the same thing.
Demand is also based on ability to pay. If you cannot pay, you have no effective
demand.
What a buyer pays for a unit of the specific good or service is called price. The
total number of units purchased at that price is called the quantity demanded. A
rise in price of a good or service almost always decreases the quantity demanded
of that good or service. Conversely, a fall in price will increase the quantity
demanded. When the price of a gallon of gasoline goes up, for example, people
look for ways to reduce their consumption by combining several errands,
commuting by carpool or mass transit, or taking weekend or vacation trips closer
to home. Economists call this inverse relationship between price and quantity
demanded the law of demand. The law of demand assumes that all other
variables that affect demand are held constant.

'Law of Demand'
The 'Law Of Demand' states that, all other factors being equal, as the price of a
good or service increases, consumer demand for the good or service will
decrease, and vice versa. There is an inverse relationship between quantity
demanded and its price. The people know that when price of a commodity goes
up its demand comes down. When there is decrease in price the demand for a
commodity goes up. There is inverse relation between price and demand. The
law refers to the direction in which quantity demanded changes due to change in
price.
Assumptions of the law
1. There is no change in income of consumers.
2. There is no change in the price of product.
3. There is no change in quality of product.
4. There is no substitute of the commodity.
5. The prices of related commodities remain the same.
6. There is no change in customs.
7. There is no change in taste and preference of consumers.
8. The size of population remains the same.
9. The climate and weather conditions are same.
10. The tax rates and other fiscal measures remain the same.

The determinants of demand:

i. Price of a Product or Service:Affects the demand of a product to a large extent.
There is an inverse relationship between the price of a product and quantity
demanded. The demand for a product decreases with increase in its price, while
other factors are constant, and vice versa.For example, consumers prefer to
purchase a product in a large quantity when the price of the product is less. The
price-demand relationship marks a significant contribution in oligopolistic market
where the success of an organization depends on the result of price war between
the organization and its competitors.

ii. Income:Constitutes one of the important determinants of demand. The income

of a consumer affects his/her purchasing power, which, in turn, influences the
demand for a product. Increase in the income of a consumer would automatically
increase the demand for products by him/her, while other factors are at constant,
and vice versa.For example, if the salary of Mr. X increases, then he may increase
the pocket money of his children and buy luxury items for his family. This would
increase the demand of different products from a single family. The income-
demand relationship can be analyzed by grouping goods into four categories,
namely, essential consumer goods, inferior goods, normal goods, and luxury
goods.The relationship between the income of a consumer and each of these
goods is explained as follows:
a. Essential or Basic Consumer Goods:
Refer to goods that are consumed by all the people in the society. For example,
food grains, soaps, oil, cooking fuel, and clothes. The quantity demanded for basic
consumer goods increases with increase in the income of a consumer, but up to a
fixed limit, while other factors are constant.
b. Normal Goods:
Refer to goods whose demand increases with increase in the consumer’s income.
For example, goods, such as clothing, vehicles, and food items, are demanded in
relatively increasing quantity with increase in consumer’s income. The demand
for normal goods varies due to .different rate of increase in consumers’ income.
c. Inferior Goods:
Refer to goods whose demand decreases with increase in the income of
consumers. For example, a consumer would prefer to purchase wheat and rice
instead of millet and cooking gas instead of kerosene, with increase in his/her
income. In such a case, millet and kerosene are inferior goods for the consumer.
However, these two goods can be normal goods for people having lower level of
income. Therefore, we can say that goods are not always inferior or normal; it is
the level of income of consumers and their perception about the need of goods.
d. Luxury Goods:
Refer to goods whose demand increases with increase in consumer’s income.
Luxury goods are used for the pleasure and esteem of consumers. For example,
expensive jewellery items, luxury cars, antique paintings and wines, and air
travelling.

iii. Tastes and Preferences of Consumers:Play a major role in influencing the

individual and market demand of a product. The tastes and preferences of
consumers are affected due to various factors, such as lifestyles, customs,
common habits, and change in fashion, standard of living, religious values, age,
and sex.A change in any of these factors leads to change in the tastes and
preferences of consumers. Consequently, consumers reduce the consumption of
old products and add new products for their consumption. For example, if there is
change in fashion, consumers would prefer new and advanced products over old-
fashioned products, provided differences in prices are proportionate to their
income.Apart from this, demand is also influenced by the habits of consumers.
For instance, most of the South Indians are non-vegetarian; therefore, the
demand for non- vegetarian products is higher in Southern India. In addition, sex
ratio has a relative impact on the demand for many products.For instance, if
females are large in number as compared to males in a particular area, then the
demand for feminine products, such as make-up kits and cosmetics, would be
high in that area.

iv. Price of Related Goods:Refer to the fact that the demand for a specific product
is influenced by the price of related goods to a greater extent.Related goods can
be of two types, namely, substitutes and complementary goods, which are
explained as follows:
a. Substitutes:
Refer to goods that satisfy the same need of consumers but at a different price.
For example, tea and coffee, jowar and bajra, and groundnut oil and sunflower oil
are substitute to each other. The increase in the price of a good results in increase
in the demand of its substitute with low price. Therefore, consumers usually
prefer to purchase a substitute, if the price of a particular good gets increased.
b. Complementary Goods:
Refer to goods that are consumed simultaneously or in combination. In other
words, complementary goods are consumed together. For example, pen and ink,
car and petrol, and tea and sugar are used together. Therefore, the demand for
complementary goods changes simultaneously. The complementary goods are
inversely related to each other. For example, increase in the prices of petrol
would decrease the demand of cars.

v. Expectations of Consumers:Imply that expectations of consumers about future

changes in the price of a product affect the demand for that product in the short
run. For example, if consumers expect that the prices of petrol would rise in the
next week, then the demand of petrol would increase in the present.On the other
hand, consumers would delay the purchase of products whose prices are
expected to be decreased in future, especially in case of non-essential products.
Apart from this, if consumers anticipate an increase in their income, this would
result in increase in demand for certain products. Moreover, the scarcity of
specific products in future would also lead to increase in their demand in present.

vi. Effect of Advertisements:Refers to one of the important factors of determining

the demand for a product. Effective advertisements are helpful in many ways,
such as catching the attention of consumers, informing them about the
availability of a product, demonstrating the features of the product to potential
consumers, and persuading them to purchase the product. Consumers are highly
sensitive about advertisements as sometimes they get attached to
advertisements endorsed by their favorite celebrities. This results in the increase
demand for a product.

vii. Distribution of Income in the Society:Influences the demand for a product in

the market to a large extent. If income is equally distributed among people in the
society, the demand for products would be higher than in case of unequal
distribution of income. However, the distribution of income in the society varies
widely.This leads to the high or low consumption of a product by different
segments of the society. For example, the high income segment of the society
would prefer luxury goods, while the low income segment would prefer necessary
goods. In such a scenario, demand for luxury goods would increase in the high
income segment, whereas demand for necessity goods would increase in the low
income segment.

viii. Growth of Population:Acts as a crucial factor that affect the market demand
of a product. If the number of consumers increases in the market, the
consumption capacity of consumers would also increase. Therefore, high growth
of population would result in the increase in the demand for different products.

ix. Government Policy:Refers to one of the major factors that affect the demand
for a product. For example, if a product has high tax rate, this would increase the
price of the product. This would result in the decrease in demand for a product.
Similarly, the credit policies of a country also induce the demand for a product.
For example, if sufficient amount of credit is available to consumers, this would
increase the demand for products.
x. Climatic Conditions:Affect the demand of a product to a greater extent. For
example, the demand of ice-creams and cold drinks increases in summer, while
tea and coffee are preferred in winter. Some products have a stronger demand in
hilly areas than in plains. Therefore, individuals demand different products in
different climatic conditions.

Demand elasticity is a measure of how much the quantity demanded will change
if another factor changes. Demand elasticity refers to how sensitive the demand
for a good is to changes in other economic variables, such as the prices and
consumer income. Demand elasticity is calculated by taking the percent change
in quantity of a good demanded and dividing it by a percent change in another
economic variable. A higher demand elasticity for a particular economic variable
means that consumers are more responsive to changes in this variable, such as
price or income.
Law of demand explains the inverse relationship between price and demand of a
commodity but it does not explain to the extent to which demand of a
commodity changes due to change in price. A measure of a variable's sensitivity
to a change in another variable is elasticity. In economics, elasticity refers the
degree to which individuals change their demand in response to price or income
changes.
It is calculated as −
Elasticity = % Change in quantity / % Change in price
Changes in Demand
Change in demand is a term used in economics to describe that there has been a
change, or shift in, a market's total demand. This is represented graphically in a
price vs. quantity plane, and is a result of more/less entrants into the market,
and the changing of consumer preferences. The shift can either be parallel or
nonparallel.
Extension of Demand- Other things remaining constant, when more quantity is
demanded at a lower price, it is called extension of demand.

Px Dx
15 100 Original
8 150 Extension
Contraction of Demand- Other things remaining constant, when less quantity is
demanded at a higher price, it is called contraction of demand.

Px Dx
10 100 Original
12 50 Contraction

Importance of Elasticity of Demand

● Importance to producer − A producer has to consider elasticity of
demand before fixing the price of a commodity.
● Importance to government − If elasticity of demand of a product is low
then government will impose heavy taxes on the production of that
commodity and vice – versa.
● Importance in foreign market − If elasticity of demand of a produce is low
in the international market then exporter can charge higher price and
earn more profit.

Price Elasticity of demand

The price elasticity of demand is the percentage change in the quantity
demanded of a good or a service, given a percentage change in its price.Time is
also a significant factor affecting the price elasticity of demand. Generally
consumers take time to adjust to the changed circumstances. The longer it takes
them to adjust to a change in the price of a commodity, the lesser price elastic
would be to the demand for a good or service.
Income Elasticity
Income elasticity is a measure of the relationship between a change in the
quantity demanded for a commodity and a change in real income. Formula for
calculating income elasticity is as follows −
Ei = % Change in quantity demanded / % Change in income

Following are the Features of Income Elasticity −

● If the proportion of income spent on goods remains the same as income
increases, then income elasticity for the goods is equal to one.
 ● If the proportion of income spent on goods increases as income increases,
then income elasticity for the goods is greater than one.
● If the proportion of income spent on goods decreases as income
increases, then income elasticity for the goods is less by one.
Cross Elasticity of Demand
An economic concept that measures the responsiveness in the quantity
demanded of one commodity when a change in price takes place in another
good. The measure is calculated by taking the percentage change in the quantity
demanded of one good, divided by the percentage change in price of the
substitute good −
Ec= ΔqxΔpy × pyqy
● If two goods are perfect substitutes for each other, cross elasticity is
infinite.
● If two goods are totally unrelated, cross elasticity between them is zero.
● If two goods are substitutes like tea and coffee, the cross elasticity is
positive.
● When two goods are complementary like tea and sugar to each other, the
cross elasticity between them is negative.

The elasticity of demand is of great importance in managerial decision making.

1. 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 are due to the change in price, the knowledge of
elasticity of demand is necessary for determining the output level.

2. In the Determination of Price:

The elasticity of demand for a product is the basis of its price determination. The
ratio in which the demand for a product will fall with the rise in its price and vice
versa can be known with the knowledge of elasticity of demand. If the demand
for a product is inelastic, the producer can charge high price for it, whereas for an
elastic demand product he will charge low price. Thus, the knowledge of elasticity
of demand is essential for management in order to earn maximum profit.
3. In Price Discrimination by Monopolist:
Under monopoly discrimination the problem of pricing the same commodity in
two different markets also depends on the elasticity of demand in each market. In
the market with elastic demand for his commodity, the discriminating monopolist
fixes a low price and in the market with less elastic demand, he charges a high
price.

4. In Price Determination of Factors of Production:

The concept of elasticity for demand is of great importance for determining prices
of various factors of production. Factors of production are paid according to their
elasticity of demand. In other words, if the demand of a factor is inelastic, its
price will be high and if it is elastic, its price will be low.

5. 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.

6. In Dumping:
A firm enters foreign markets for dumping his product on the basis of elasticity of
demand to face foreign competition.

7. In the Determination of Prices of Joint Products:

The concept of the elasticity of demand is of much use in the pricing of joint
products, like wool and mutton, wheat and straw, cotton and cotton seeds, etc. In
such cases, separate cost of production of each product is not known.Therefore,
the price of each is fixed on the basis of its elasticity of demand. That is why
products like wool, wheat and cotton having an inelastic demand are priced very
high as compared to their by-products like mutton, straw and cotton seeds which
have an elastic demand.
8. In the Determination of Government Policies:
The knowledge of elasticity of demand is also helpful for the government in
determining its policies. Before imposing statutory price control on a product, the
government must consider the elasticity of demand for that product. The
government decision to declare public utilities those industries whose products
have inelastic demand and are in danger of being controlled by monopolist
interests depends upon the elasticity of demand for their products.

9. Helpful in Adopting the Policy of Protection:

The government considers the elasticity of demand of the products of those
industries which apply for the grant of a subsidy or protection. Subsidy or
protection is given to only those industries whose products have an elastic
demand. As a consequence, they are unable to face foreign competition unless
their prices are lowered through subsidy or by raising the prices of imported
goods by imposing heavy duties on them.

10. In the Determination of Gains from International Trade:

The gains from international trade depend, among others, on the elasticity of
demand. A country will gain from international trade if it exports goods with less
elasticity of demand and import those goods for which its demand is elastic.
In the first case, it will be in a position to charge a high price for its products and
in the latter case it will be paying less for the goods obtained from the other
country. Thus, it gains both ways and shall be able to increase the volume of its
exports and imports.