THEORETICAL IMPORTANCE

THEORETICAL IMPORTANCE Apart from the practical importance of the concept of elasticity of demand, the concept plays a crucial role in economic theory and is extensively used as a tool of economic analysis. We mention below some aspects of economic theory where use is...

Increasing Returns

Increasing Returns When an industry is subject to increasing returns, the manufacturer lowers the price to develop the market so that he may be able to produce more and take full advantage of the economies of large-scale production.Output. Elasticity of demand affects...

Taxation.

Taxation. The Minister of Finance can be more sure of his revenues if he taxes those commodities for which the demand is inelastic. The tax will no doubt raise the price but the demand being inelastic. people must continue to buy the same quantity of the commodity....

Geometrical Method: Point Elasticity

Geometrical Method: Point Elasticity This method tells us how to measure elasticity of demand at any point on a demand curve. The demand curve in Fig. 11.12. 00 is ‘the straight line demand curve. Elasticity is represented by the fraction: distance from 0 to a...

Proportional Method

Proportional Method In this method, we compare the percentage change in price with the percentage change in demand. The elasticity is the ratio of the percentage change in the quantity demanded to percentage change in price charged. The formula is. Price Elasticity...

Total Outlay Method

Total Outlay Method According to this method, we compare the total outlay of the purchaser (or total revenue, i.e., total value of sales from the point of view of the seller) before and after the variations in price. Elasticity of demand is expressed in three ways:...