Question

Discuss why the concept of Elasticity is so important to businesses when developing pricing strategies for their products-be sure to include a couple of determinants of elasticity in your discussion. (2) Discuss 'Market Externalities-good,bad or indifferent'   

Answer 1

1.

Concept of elasticity is very important, because it contributes in setting the right price of the product. If a product has many substitutes and consumers can switch to different alternatives, then demand is price elastic in nature and pricing strategy is to make a competitive price of the product. If there is no alternative, making demand to be inelastic. Then, price will be kept at higher end and people will buy the product as it happens with the gasoline and electricity. Further, when a consumer spends bigger amount of income on a good, then its demand is elastic. Then, firms set competitive price. Not doing so, will firm will lose the market share. So, elasticity is to be checked first by the firms and then price is set to maximize the profit and maintain their market share.

2.

Market externalities lead to market failure if it is not cured, so it is not good in a broad sense. But, when externality is positive, then government tries to maximize it by giving subsidies and society and economy get the benefits. So, positive externality can be used to help society grow and benefit. In contrast to it, negative externality, leads to market failure if government does not take measure to make firms produce socially optimal level of output. So, narrowly, it is important to check the nature of externality and its impact to decide whether it is good or bad.