Obviously, it is of great importance that the Bomber’s management know the elasticity of the demand for their tickets. However, in the real world, sellers do not have neat and precise demand schedules to guide them in their pricing decisions. While the market research departments of larger corporations may expend considerable effort in attempts to estimate the elasticity of demand for their products, many smaller businesses operate on a more or less trial-and-error basis in this area, gaining a rough idea of the elasticity of demand by “testing the market” with small price increases or reductions. This does not mean that sellers operate in the dark in their pricing decisions. Obviously, the Organization of Petroleum Exporting Countries had a reasonable understanding that, in the 1970′s, the industrialized nation’s demand for oil was quite inelastic. Small retailers sense clearly that if their prices rise above those of their competitors, the demand for their products will be quite elastic. Similarly, discount retailers operate on the basis that at least a certain segment of consumers is quite sensitive to prices.
In a similar way, elasticity of demand influences the ability of workers to increase their wages. For instance, the demand for certain highly skilled workers, such as computer programmers, is highly inelastic. Such work has to be done, and there is no substitute way of doing it, Consequently, such workers are in an excellent position to bargain for higher wages – which they have been able to do. Others, however, are not in such a fortunate position. The services of hairdressers, for example, are not only not really a necessity for many people, but also there are substitutes available – people can do their own hair or even buy wigs. As a result, the demand for the services of hairdressers is quite elastic, making it much more difficult for them to raise their incomes in step with other people’s wages.
Elasticity of demand is also an important consideration underlying the taxation policies of governments. Three of the most heavily taxed products are liquor, tobacco and gasoline. Moral and conservation considerations aside, one factor underlying these products being singled out for exceptionally high taxes is the fact that the demand for all three is inelastic: sales (and tax revenues) hold up quite well even after tax increases have raised their prices considerably. there is little to be said for such heavy taxes on products whose demand is elastic, as sales would fall drastically, devastating those industries (not to mention reducing government tax revenues.)
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