Guidance for Finance Minister
The concept of elasticity of demand provides a guideline to the finance minister to impose taxes on different commodities. He will impose more taxes on goods for which demand is more elastic i.e. luxuries and fewer taxes on those for which demand is less elastic i.e. necessities of life.
Guidance for Price Determination
Producers determine the prices of their products on the basis of this concept. They increase the prices of less elastic goods and vice versa.
Guidance for Monopolist
The concept provides a sound foundation for price discrimination in a monopoly. The monopolist charges high prices in that market where demand is the less elastic and low price in that market where demand is more elastic.
Guidance for Industrialist
An industrialist prefers to produce that product under the law of increasing returns whose demand is more elastic and that product under the law of diminishing returns whose demand is less elastic.
Determination of Fares
In the determination of fares of transportation, the concept of Ed plays a key role. For elastic transport, the fare should be low and vice versa.
Guidance for Exporters
In case of the elastic international market, the exporters charge a low price and the balance of trade remains unfavourable for the country while in case of the inelastic or less elastic international market, they charge a high price and the balance of trade boosts up.
Guidance for Wage Determination
In the case of the inelastic type of labour, the labour unions can easily get higher wages from the producers for the workers while in case of an elastic type of labour, it cannot be.
Determination of Rates of Foreign Exchange
Rate of foreign exchange is determined on the basis of elasticity of imports and exports of a country.
According to Dr Keynes; “The concept of elasticity is so important that in the provision of terminology and apparatus to aid thought, I don’t think that Marshall did any greater service than by the explicit introduction of the idea of elasticity”
On the basis of the above discussion, it can be concluded that the concept of elasticity of demand plays a key role in taking major economic decisions.