Applications

1) Monopoly Price:
The concept of price elasticity of demand is
applied by the monopolist in fixing market
price of his product. The monopolist has full
control of the market. He can fix whatever
price he wishes to. But ha may lose the
market in case price happens to be very
high. Often, he studies price elasticity of
demand for his product before fixing price of
the product. In case elasticity of demand is
found to be high, he would prefer to fix low
price, because high price would drive many
buyers out of the market. On the other
hand, if elasticity of demand is low, he
would prefer to fix high price , because
demand for his product is not likely to be
significantly lowered.
Briefly, product price in the monopoly
market is inversely related to price elasticity
of demand. Higher elasticity leads to lower
price, and vice versa.
 Example of monopoly price:

2) Price Discrimination:
The monopoly practices price discrimination.
Generally, he divides his market into sub-
markets, charging different price for the same
product. Here again, he is guided by the price
elasticity of demand for his product. Higher
price is fixed in the sub-market where
elasticity of demand is high. Thus, a doctor
having two clinics (across different areas)
may charge higher fee in the area inhabited
by the rich people (where price elasticity of
demand is expected to be low) and charge
lower fee in the area inhabited by poor people
(where price elasticity of demand is expected
to be high).
Example of price discrimination:
One example of price discrimination can be
seen in airline industry. Consumers buying
airline tickets several months in advance
typically pay less than consumers purchasing
at the last minute. When demand for a
particular flight is high, airlines raise ticket
prices in response.
By contrast, when tickets for a flight are not
selling well, the airline reduces the cost of
available tickets to try to generate sales.
Because many passengers prefer flying home
late on Sunday, those flights tend to be more
expensive than flights leaving early Sunday
morning. Airline passengers typically pay
more for additional legroom too.
3) Commodity taxation:
The concept of price elasticity of demand is
of underlined significance to the finance
minister in fixing commodity taxation. Habit
forming goods such as cigarettes and liquor
are heavily taxed, partly because elasticity of
demand for these products is low. Owing to
low price elasticity of demand (and
consequently high taxation), such goods are
a significant source of tax revenue for the
government.
The incidence of commodity taxation:
4) Wage structure:
Wage structure (or wages across different
occupations) depends considerably on price
elasticity of demand. Demand for labour is
derived demand. It is derived from (or
depends upon) the demand for goods
produced by labour. In case price elasticity of
demand for these goods is low, implying
stable demand for these goods, demand for
labour would also be stable. In such a
situation, wage rate tends to be high (as in IT
industry.) On the other hand, low wages
prevail in those industries (like a demand
cutting) where demand for labour is not stablr
owing to high elasticity of demand for goods
produced by the labour.
5) Export subsidies:
High elasticity of demand for the domestic
goods in the international market compels
the government to offer protection to the
domestic industry by way of subsidies. Export
subsidies are offered to increase international
competitiveness of the domestic producers
by the way of low product price. In case
international demand for the domestic goods
is stable (implying low elasticity of demand),
export subsidy would not be offered.
Example:
6) Minimum support price (MSP):
It is guided by the consideration of low price
elasticity of demand for food grains that the
government offers minimum support price to
the farmers (support price is the price offered
by the government to the farmers for the
purchase of their product.) In the absence of
MSP and owing to low price elasticity of
demand, bulk supplies during the harvest
season would lead to ‘price-crash’. Implying
low farm incomes even when the harvest is
good. MSP (bases on low price elasticity of
demand for food grains) is meant to stabilize
income of the farmers. Example:
7) Burden of GST:
Concept of elasticity of demand helps
understand the burden of GST on the buyers
and the sellers. In case price elasticity of
demand is high, the sellers may not be able
to shift the entire burden of GST on the
buyers, particularly when the GST rate is also
very high. In case they do it, the sellers would
lose the buyers, leading to a fall in demand
and fall in profits. It is partly because of this
fear of GST burden (on the sellers
themselves) that the small traders in the
Indian markets are opposing the introduction
of this tax. Example:
8) Currency depreciation and income from
exports:
The concept of price elasticity of demand
helps understand how depreciation of the
domestic currency propels (raises) domestic
exports and therefore, income from exports.
If the domestic currency depreciates (say in
relation to US dollar), one dollar is converted
into more rupees. This is expected to raise
demand for our products in the international
market, implying a raise in our exports.
However, raise in exports may not lead to
raise in income from exports in terms of US
dollars in case price elasticity of demand (for
domestic goods) happens to be less than
unity. We know that, it is only when price
elasticity of demand for a good is greater
than unity (Ed>1) that the expenditure on
that good happens to rise. Thus, the concept
of elasticity of demand helps analyse the
implications of depreciation (and
appreciation) of the domestic currency in
terms of domestic exports and income from
exports.
Example of currency depreciation:
If GPB/USD was trading at 1.2700, this means
that you would pay $1.27 for £1.00. If the
price of GBP/USD rises from 1.2700 to
1.5000, the dollar would be said to have
depreciated in value, and the pound would
have appreciated in value – as you would now
need more dollars to buy the same number of
pounds.
Example of income from exports:
We are hopeful that the outcomes of the
Longitudinal Teacher Education7 Australian
Education International, 2010, ‘Research
Snapshot: Export Income to Australia from
Education Services in 2009’, Australia.

9) Market structure:
The concept of price elasticity of demand is
useful in understanding the structure of the
market. Using the concept elasticity of
demand, we can assess the degree of the
market control by the producers. High
elasticity of demand for a product points to
low market control by its producers. It
suggests the presence of a large number of
producers (firms) producing that commodity.
On the other hand, low elasticity of demand
for a product points to higher degree of
market control. It suggests the presence of a
small number of firms producing that
commodity. Likewise, highly inelastic demand
for a product points to (almost) complete
control of the market. It suggests
monopolistic control of the market.
Briefly, higher the elasticity of demand, lesser
the market control, larger the number of firms
and more competitive is the market structure.
On the other hand, lower the elasticity of
demand, greater the market control, lesser
the number of firms and less competitive (or
monopolistic) is the market structure.
Example: