How is elasticity useful to business firms and government?

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Elasticity is the degree of responsiveness of a product’s demand to a change in its price. A product can have either elastic or inelastic demand. An item with an elastic demand is more responsive to changes in price; a small decrease in price can lead to a large increase in the quantity demanded, and vice versa. On the other hand, a product with inelastic demand is less responsive to price changes.

Elasticity helps businesses determine the prices for goods. As long as the product is less responsive to changes in price, the firm can increase its cost to maximize revenues and profits. On the other hand, the company will want to set a lower price for goods with elastic demand.

Elasticity also helps the government create policies. If the government wants to get more revenues from tax, it will look at the goods’ elasticity. In most cases, the government will increase the levy on products with inelastic demand. The government does this because they know the buyers aren’t going to stop...

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