Importance of Elasticity of Demand in the Agribusiness Sector - Agribusiness Education and Research International

Importance of Elasticity of Demand in the Agribusiness Sector. The understanding of the concept of elasticity of Demand is highly useful in agribusiness economical side both from the theoretical and practical points of view. It is indispensable in the field of industry, trade, and commerce as well.

The concept of elasticity of demand is of great practical importance, in the understanding of some problems and the formulation of economic policies, such as:

Determination of price under monopoly:

A monopolist while fixing the price for his product takes into consideration its elasticity of demand (1) if the demand for his product is elastic, the monopolist will earn more profit by fixing a low price. Low price means large sales and hence, large total revenue (2) if demand is inelastic, he will be in a position to fix up the high price. High price with demand remaining more or less constant (being inelastic) means large total revenue.

Agribusiness International Trade:

The concept of elasticity of demand is also important in the field of international agribusiness trade. A country will gain by increasing the price of its exports if its demand in the importing country is inelastic. If their demand in importing countries is elastic then the exporting country will reduce the price and increase her total exports and thereby stand to gain. A country will be able to import those goods cheaply whose demand is elastic in the home market.

Effect on Employment:

The effect of automatic machines on employment depends upon the elasticity of demand for the goods produced by these machines. Workers often oppose the use of automatic machines fearing unemployment. Machines do not always reduce the demand for labor. It all depends upon the price elasticity of demand for their production. In some cases, where machines reduce the cost and price of products with elastic demand, the amount demanded may go up. Consequently, production may have to be enlarged and extra workers employed. On the opposite, if the demand for production is inelastic, machines will replace workers and create unemployment.

Determination of Wage:

The concept of elasticity of demand is important in the determination of wages of a particular type of labor. If the demand for labor in an agribusiness industry is elastic, strikes and other trade union tactics will not be of any avail in raising wages. If however, the demand for labor is inelastic even the threat of a strike by the union will compel the employer to raise the wages of workers in the agribusiness industry.

The Advantage to the Finance Minister:

The concept of elasticity of demand is of paramount importance to the finance minister. The finance minister has to find out how he can bring more revenue to the exchequer. For this, while imposing new taxes on agribusiness Finance minister takes into consideration the elasticity of demand. Taxes on goods having elastic demand will afford a lesser amount of revenue. It is because taxes will raise their prices and thus bring down their demand. Less demand means less revenue. Goods having inelastic demand are taxed at a higher rate. No doubt the price of the goods will arise on account of these taxes but there will be little fall in their demand. Consequently, more tax revenue will accrue to the state exchequer.

Determination of Price of Public Utilities:

The concept of elasticity of demand helps in fixing prices for the services rendered by public utility services of mass consumption like water, electricity, post and telegraph, railways, and communication. Where the demand for services is inelastic, a high price is accused, at the same time as in the case of elastic demand a lower price is accused. That is why household consumers are charged a high rate of elasticity than industrial or agribusiness consumers by HVPN.

Distribution of Burden of Taxation:

The concept of elasticity of demand is important in explaining the incidence of indirect taxes like sales tax; excise duty etc., on consumers and producers relating to agribusiness. If the demand for a product is inelastic, the burden of the indirect tax will be more on the consumers. The price of the product will increase due to the imposition of the tax, but demand being inelastic will not contract. In this situation burden on the producers or sellers will be less. On the other hand, if the demand for the product is elastic the burden of the indirect tax will comparatively be more on the producers.

Basis of the Policy of Devaluation:

The consideration of elasticity of demand for imports and exports for a country that is thinking of correcting her adverse balance of payments by devaluation. Devaluation makes exports cheaper and imports dearer of the country adopting it. When we evaluate any currency, the first effect will be that the prices of our imports will rise and we will be induced to reduce our imports. But this depends upon the elasticity of demand for imports. On the other hand, the fall in the foreign price of exports will induce us to export more but it would depend upon the elasticity of demand of the foreigners for our exports. Thus the extent to which we are in a position to reduce the gap between our imports and exports depends upon the elasticity of demand for exports and imports.

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