Question

Describe the applications of elasticity in different fields.

Answer 1

Elasticity:

This is the responsiveness of consumption of a product due to the change its price, consumer income, and price of other related good.

Applications are as below:

#) if the good has inelastic price elasticity of demand (PED < 1): the price of the good could be increased for increasing revenue. Example: cigarette has inelastic price elasticity of demand, meaning its price change cannot create much change in its quantity consumption. Therefore, if its price increases its total revenue increases.

#) if the good has elastic price elasticity of demand (PED > 1): the price of the good should be decreased for increasing revenue. Example: Car has elastic price elasticity of demand, meaning a little price change of car creates huge impact on its quantity consumption. Therefore, if its price decreases cars would be demanded more, creating an earning of higher total revenue income.

#) if the good has unit price elasticity of demand (PED = 1): the price should not be changed, because it can’t change total revenue at all. Example: Smartphone has unit price elasticity of demand, meaning a price change gives equal impact on quantity consumption. Therefore, the price change has no effect on total revenue.