Answer to Question #57375 in Microeconomics for dudman

Question

Why may businesses and governments be interested to know the price elasticity of demand of products

Answer 1

Business is interested to know the price elasticity of demand because:
-Elasticity of demand makes businessmen to increase prices (when demand is inelastic) or decrease prices (when demand is elastic);
-Looking at elasticity of demand businessmen decide the amount of spent advertisement – if demand is elastic, sales can be increased only by well financed advertisement plan.
Government is interested to know the price elasticity of demand because:
-With price elasticity of demand government can know the impact of tax (sorts of taxes that raise the price of products – value-added taxes, impose sales taxes, etc.). If demand is inelastic government can increase the taxes without creation situation of business losses or tax revenues fall. And government will not raise taxes on products that are very elastic;
-Elasticity of demand can determinate the foreign exchange rate of national currency – the rate is based on the elasticity of exports and imports.