- What is the benefit by analyzing the elasticity of price ?
When a firm change its price and there is a change in demand and therefore a change in total revenue. If firms know the income elasticity of demand and a change in total revenue for their products they can respond to predict changes in income. Firms that produce goods that are income elastic will expect changes in income to plan ahead. Furthermore producers of inferior goods depends on a fall in income that may increase their productivity. On the other hand price elasticity provides useful information about the firm to the government. That helps the government to impose indirect taxation such as : VAT (Value Added Tax) and excise duties on products that have inelastic demand. Furthermore government target goods that are either necessities or have few substitute but government usually don't target goods that are essential for human survival.