Question

You have been employed as an Economic Consultant by MBA company limited. explain to the board how price elasticity of demand for the company's product affects:
1 Company's pricing policy and hence revenue levels
2. Government's taxation policy
3 Government's devaluation policy

Answer 1

Answer -

The price elasticity of demand affects many factors. If the demand for the product is relatively elastic , it means that the price can be lowered to see the more change in demand and hence the revenue of the company will rise. But the price cannot be raised otherwise demand and revenue will fall. Inelastic demand will also raise revenue because price can be changed without demand getting affected.

If demand will be elastic , the tax levied on it will be less. This is in order to prevent the demand from falling. If the demand will be inelastic customer can be burdened with tax.

The devaluation of currency leads to domestic goods becoming cheaper. If the demand is elastic , demand for goods by outsiders will rise , exports will rise as they will be cheaper. There will be no effect of devaluation if the demand is inelastic.