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smu assignments MB0042 Q1. Discuss the practical application of Price elasticity and Income elasticity of demand.

Answer: The practical applications of price elasticity of demand are as follows:
1. Production planning It helps a producer to decide about the volume of production. If the demand for his products is inelastic, specific quantities can be produced while he has to produce different quantities, if the demand is elastic.
2. Helps in fixing the prices of different goods It helps a producer to fix the price of his
product. If the demand for his product is inelastic, he can fix a higher price and if the demand is elastic, he has to charge a lower price.
3. Helps in fixing the rewards for factor inputs Factor rewards refer to the price paid for their services in the production process. It helps the producer to determine the rewards for factors of production.
4. Helps in determining the foreign exchange rates – Exchange rate refers to the rate at which currency of one country is converted in to the currency of another country.
5. Helps in determining the terms of trade t is the basis for deciding the ‘terms of trade’ between two nations.
6. Helps in fixing the rate of taxes Taxes refer to the compulsory payment made by a citizen to the government periodically without expecting any direct return benefit from it.
7. Helps in declaration of public utilities Public utilities are those institutions which provide certain essential goods to the general public at economical prices.
8. Poverty in the midst of plenty The concept explains the paradox of poverty in the midst of plenty.

Practical application of income elasticity of demand:
1. Helps in determining the rate of growth of the firm – If the growth rate of the economy and income growth of the people is reasonably forecasted, in that case, it is possible to predict expected increase in the sales of a firm and vice-versa.
2. Helps in the demand forecasting of a firm – It can be used in estimating future demand provided that the rate of increase in income and the Ey for the products are known. 3. Helps in production planning and marketing – The knowledge of Ey is essential for production planning, formulating marketing strategy, deciding advertising expenditure and nature of distribution channel, etc. in the long run.


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