Question

AGBU 440-01 Agricultural Policy

Why is it important to know elasticities of supply and demand when making policies?

Answer 1

Answer. The elasticity of supply and demand is of great importance to the government agencies and the business enterprises as it helps these agencies in analysing the policy implications on the demand and supply of different products and services. Following are the major importance of such elasticitis-

• It helps the agencies in knowing or forcasting the output or demand level so that the goods can be peoduced accordingly and there is not surplus inventory. Since the demand of various goods is majorly affected by price so it helps to determine the right price and the right output level so that production or profitability is maintained.

• It helps in the situation of monopoly where there is need to price the customer differently and thus here the demand of the two or more reguons must be analysed so that the price can be set accordingly. It helps the firms and the government in maintaing the profitability level.

•Such policies are also vital for determining the price of factors of different production which are used in the peoduction of the goods and services. It can be seen from the elasticity if demand and supply.

• Analyising the elasticities of demand and supply can help the government in determining the the effect of tax. In other words it means whether the consumers or producers are willing to pay such amount of tax by examining the elasticity of demand and supply.

• It helps in determining the right price of joint products like sheep. Where it can be used for getting the wool and the meat also. Also the demand for one such good can be elastic and inelastic for another such good.

• One major policy factor is of providing firms with subsidies. It helps the government in fetermining if the firm which is getting the subsidy produces products or services which has inelastic demand.

• It also helps the government in analysing whether the imported goods have inelastic or elastic demand and if the exported goods have elastic or inelastic demand. Thus, it helps in determining the gains or losses from international trade.