27th November 2020

M.E ASSIGNMENT
Submitted By: Adil Mustaque Inamdar
Topic: MANAGERIAL APPLICATION OF PRICE
ELASTICITY OF DEMAND
Principal Of Elasticity of Demand:
Price Elasticity of demand is a measure of how much
the quantity demanded of a good responds to a change
in the price of that good.
Demand

Price
Price of Elasticity of Demand=
% of change in quantity demanded
% change in price
Types of price elasticity of demand:
 PED = 0 = Perfectly inelastic demand
 PED < 1 = inelastic demand
 PED = 1 = unit elastic demand
 PED > 1 = elastic demand
  PED = ∞ = infinite elasticity
Applications of price elasticity of demand:
Pricing Decisions:
Price has an important function in markets. It acts as a
signal to both producers and consumers. For producers
it gives them that it is worth producing a good or not
and for consumers it provides an indication about value.
Producers of a good takes into consideration that the
elasticity of demand for his product while deciding the
price of the good or a change in the price. If the
numerical coefficient of price elasticity of demand i.e.
is less than one (e>1) then producers would charge a
relatively smaller price for the product, the
proportionate rise in quantity demanded (q) would be
larger than the proportionate fall in price(p), so the p
falls the revenue of the producer will not rise. Pricing of
a product or service refers to the fixation of a selling
price to a product or service provided by the firm.
Selling price is the amount for which customers are
charged for some product manufactured or for a service
provided by the firm. The pricing decisions are
influenced by both internal and external factors.
Firms that deal in inelastic goods or services can
transfer the extra cost of production to their customers
without adversely affecting the demand. As a result.
price inelasticity offers better flexibility at setting up or
establishing pricing strategies. Businesses that deal in
goods that are price inelastic are better equipped for
profit maximization and are betterer protected against
economic downturns.
Therefore, businesses that deal in goods that are price
inelastic are better equipped for profit maximization
and are better protected against economic downturns.
Decisions On Taxation:
Price elasticity of demand is also used by government
for imposing tax. When the government imposes an
indirect tax on the production and sale of a good, the
price of the good will tend to rise for the producers and
sellers add the money to be paid as tax to their
respective costs. Now, the demand for the good will fall
when its price rises, it would depend on the value of
elasticity (e) for the good. If e is effectively large than
the proportionate fall in its demand would be larger
than its price rises. Before imposing a tax on a good,
the government would have to consider the data
regarding the elasticity of demand for the good. At the
last, the supply and demand curve and the product
elasticity will ultimately dictate the party that bears
more of the tax burden. The effect of any tax depends
on the responses of both the consumer and producer.
The burden of the tax will typically fall on the side of
the market less-sensitive to price changes. In most
cases, both companies will invariably absorb some
portion of the tax. The supply and demand curve and
the product's elasticity will ultimately dictate the party
that bears more of the tax burden.

TAXATION ON INELASTIC DEMAND

 TAXATION ON ELASTIC DEMAND

Labour Market:
The concept of price elasticity of demand is widely used
in labour market. In the labour market, the price of
labour or rate of wage(w) would depend on the
elasticity of demand for labour. If a demand for a
particular type of labour is relatively inelastic that is
why if it is relatively difficult to reduce the demand for
labour as wages rises, then the trade unions demand
higher wages. The absolute value of elasticity of
demand for labour is greater than or less than one. If it
is greater than one(e>1) a one percent increase in
wages will lead to an employment, declining of greater
than one percent, this situation is referred to as an
elastic demand curve.
ln the labour market also, the price of labour or rate of
wage (W) would depend on the elasticity of demand for
labour. If the demand for a particular type of labour is
relatively inelastic, i.e., if it is relatively difficult to
reduce the demand for labour as wages rises, then the
trade unions demand higher wages.

THE GRAPH ABOVE SHOWS THE

ELASTICITY OF LABOUR DEMAND .

International Trade:
International trade of a country would depend on the
relative elasticity of demand for her export goods and
import goods. The relative elasticity would determine
whether the country would get a higher price for her
exportable as compared to the price it pays for her
imports. If the elasticity of demand for her export goods
is less than the import goods, then the price of the
export goods would be more than the import goods in
that case, this trade is in the favour of the country. On
the other hand, if the elasticity of demand for the import
goods is less than the export goods, then the price of
the import goods would be more than the export goods
in that case, this trade is would go against the country.
The relative elasticity would determine whether the
country would get a higher price for exportable as
compared to the price for the imports. If the elasticity of
demand for export goods is less than that for import
goods, then the price of the export good would be more
than that of the import goods ana in that case, the terms
of trade would be in favour of the country. On the other
hand, if the elasticity of demand for the import goods is
less than that for the export goods, then the price of the
export goods would be more than that of export goods
and, consequently, the terms of trade would go against
the country.
THANKYOU……