Editing Elasticity (economics) (section)

==Applications==
The concept of elasticity has an extensive range of applications in economics. In particular, an understanding of elasticity is fundamental in understanding the response of [[supply and demand]] in a market.<ref name=":4" />

Elasticity is also an important concept for enterprises and governments. For enterprises, elasticity is relevant in the calculation of the fluctuation of commodity prices, and its relation to income.

For enterprise, the concept of elasticity also can be applied for pricing strategy. At one hand a businessman has to calculate as if reducing the price will necessarily increase the demand of their products, or if it will not be necessary to do so and will resolve in a loss for the company<ref>{{cite book |last1=Mithani |first1=D |title=Introductory Managerial Economics |date=2009 |publisher=Global Media, Mumbai |pages=108–109 }}</ref> On the other hand, enterprises will have to consider whether Increasing price and cutting production quantity will lead to greater revenue.<ref name="Managerial Economics">{{cite book |last1=Png |first1=Ivan |title=Managerial Economics |date=30 June 2012 |publisher=Routledge |isbn=978-0-203-11609-8 |pages=43–44 |doi=10.4324/9780203116098 |edition=4th|chapter=Elasticity}}</ref> To answer that, it is suggested that if the demand of that product is elastic enough, it is profitable for the enterprise to cut the price and let the demand increase over time.<ref>{{cite book |last1=Mithani |first1=D |title=Introductory Managerial Economics |date=2009 |publisher=Global Media |location=Mumbai |pages=108–109 }}</ref> But on other hand if the price is inelastic, it is profitable to cut the quantity of production and lead the price to rise, because if the product is inelastic enough, the consumer will have no alternative to purchase the other type of product or service to replace it. However, it is clear that the enterprise should not let their product price pass by the inelasticity threshold. If it does so, then the product will be subject to price elasticity and will be affected by declining demand over time.<ref name="Managerial Economics"/>

For governments, the concept is important for the implementation of [[taxation]]. When a government wants to increase taxes on goods, it can use elasticity to judge whether increasing the tax rate will be beneficial. Often, the demand for goods will be significantly reduced when a government increases taxes on them. Whilst a tax increase on inelastic goods will not impact their demand, it may affect goods that are elastic. Aside from taxation, elasticity can also assist in analysing the need for [[Economic interventionism|government intervention]].

Additionally, for essential goods, the government must ensure that they are available to most consumers. Through setting [[price ceilings]] and [[Price floor|floors]], the government is intervening by ensuring that these goods are reasonably available.

As stated by British political economist David Ricardo, luxury goods taxes have certain advantages over necessities taxes. They are usually paid from income and, therefore, will not reduce the country's production capital. For instance, when the price of wine products rises due to increased taxes, consumers can give up drinking wine.<ref>{{cite journal |last1=Maneschi |first1=Andrea |title=The true meaning of David Ricardo's four magic numbers. |journal=Journal of International Economics |date=2004 |volume=62 |issue=2 |pages=433–443 |doi=10.1016/S0022-1996(03)00008-4 }}</ref>

Other common uses of elasticity include:
* Analysis of incidence of the tax burden and other government policies. ''See [[Tax incidence]]''.
* Income elasticity of demand, used as an indicator of industry health, future consumption patterns, and a guide to firms' [[investment]] decisions. ''See [[Income elasticity of demand]]''.
* Effect of international trade and [[terms of trade]] effects. ''See [[Marshall–Lerner condition]] and [[Singer–Prebisch thesis]].
* Analysis of [[Consumption (economics)|consumption]] and [[saving]] behavior. ''See [[Permanent income hypothesis]].''
* Analysis of [[advertising]] on consumer demand for particular goods. ''See [[Advertising elasticity of demand]].''