Importance Of Elasticity In Microeconomics
The concept of elasticity is intended to measure the degree of responsiveness of a buyer or seller to a change in a key determinant, in particular price. 1 In other words, elasticity means how sensitive are consumers for a price change.
I would like to talk about elasticity from the perspective of the total revenue. As we already know from the law of demand, when the price goes up, the quantity goes down. However, thanks for this equation, we can measure whether the product is elastic or not. There are certain products which cannot be substituted, accordingly, even if the price goes up, quantity is going to go up as well, so does total revenue. These products have been called inelastic. To this category, I would refer …show more content…
The role of elasticity in modern microeconomics is vital. There are a lot of very important advantages of elasticity, of both demand and supply:
Price determination. The seller increases or decreases the prices on the products depending whether demand is inelastic enough or not.
Monopoly market. In order to perform price discrimination, monopolist needs to be aware of the disposition of things on the market he operates, in other words, he needs to be aware of price elasticity. A good monopolist increases or decreases prices based on the elasticity of the market.
Pricing public utilities. Most of the public utilities are the products we cannot live our lives without (water, electricity, transport and so on). The demand for these utilities is inelastic. The concept of elasticity of demand helps the government to rationalize prices for these important utilities. In the other case, prices would be unstable and unfair, if private companies sold these