Igcse Economics Revision NotesO Level Economics Revision Notes

Usefullness of Price Elasticity To Producers

Knowledge of Price Elasticity would help the producer in many ways while making a decision such as:

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Pricing Policy:

The knowledge of price elasticity might help a producer to analyze the impact of changes in price levels on the demand for its product and consequently on its revenue.

The producers can use this to decide the price of the product

If the demand of the product is price elastic, by lowering its price they would earn greater revenue. If the demand of the product is price inelastic, by raising its price they would earn greater revenue.

Inelastic and Elastic Demand

Indirect taxes:

Furthermore, the producers could use the knowledge of price elasticity of demand to decide whether to bear high proportion of indirect taxes themselves or pass it on to consumers in the form of high price.

Elastic demand:        Producer’s beer high proportion of tax and charge low price.

Inelastic demand:  Producer’s can pass a high proportion of tax in the form of high prices to consumers.

Effect of subsidy:

Benefits of subsidy given by the government can also be analyzed by the price elasticity of demand.

If the demand of the product is price elastic than the producers could get a greater benefit of the subsidy given by the government.

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