The importance of the study of elasticity of demand is given below:
(i) For the Businessman : A knowledge of the nature of the elasticity of demand for his products will help a businessman to decide whether he can cut prices in a particular case or not. In general, for items where the demand is elastic, it will pay him to charge relatively low prices, while those whose demand is inelastic are better with higher prices.

(ii) For Monopolist : The price elasticity concept is very important, particularly to a monopolist who decides his own prices for goods. If the demand for their goods is inelastic, it would be beneficial to charge it at a higher price and sell a slightly smaller volume. If demand is elastic, it will be beneficial to charge a lower price and increase the sales volume.

(iii) For Finance Minister : Whenever the finance minister considers raising the rates of tax on existing tax items in view of the introduction of fresh levy on some items or for getting more revenue for the state, he conducts a thorough study of the elasticity of demand for commodity. The finance minister often taxes those items less whose demand is price-elastic. This leads to an increase in the taxation revenue from indirect taxes. In contrast, the finance minister taxes those items highly which are constantly demanded by the rich class and the burden of taxation is laid more on the rich class.

(iv) For Determination of Prices of Joint Products : The concept of elasticity of demand is used in the value of combined products, such as cotton and cotton seeds, wool and mutton, wheat and straw etc. It is not possible to find individual marginal costs of combined products here. During price fixing, producers are mostly directed by elasticity of demand. But its total receipts must cover the total cost. Transport authorities have decided to fix their rates according to the principle that ‘what will be the traffic’.

(v) For Explaining the Paradox of Poverty in the Midst of Plenty: The concept of elasticity of demand suitably explains the parodox of poverty in the midst of plenty. For example, if there is a bumper crop of wheat, then it can give farmers a signal of calamity rather than prosperity, if the demand for wheat is incompatible. Due to the increase in supply, the decline in the price of wheat will reduce the income of the farmers.

(vi) For Determining Reward of Factors of Production : The elasticity of demand is equally important in determining the awards of various factors of production in the country. For example, if demand for workers is elastic, trade unions’ efforts to meet the wages of workers will be met with failure. On the contrary, if demand for labour in a particular area is real, then trade unions can get more wages from the employer. This is also true about other factors of production. The factors of production that have more elastic demand, they accept small prizes; and the factors having an inelastic demand can be provided a big reward.

(vii) For Taking Over Public Utility Services : The state’s decision can also be explained with the help of the elasticity of demand for acquisition of public utility services. Demand for public utilities such as electricity and water supply, posts and telegraphs, public transport, etc. is generally inelastic in nature. If such public utility is assigned to private iiidividuals, then they are likely to exploit the consumer. Therefore, in the interest of social welfare, the government is the owner of such services and runs these services. For example, in Bombay City, the bus service was operating privately in the suburban areas. It was later acquired by the Greater Bombay Municipal Corporation.

(viii) For Pricing Policy for Public Utilities : Price elasticity is also influential in determining the price policy of public utility undertakings, like electric supply undertakings, railways, etc. Such undertakings determine their rates for different uses on the basis of the elasticity of demand and try to cover the losses from one group of users out of the gains reaped from the other group.

(ix) Terms of Trade Between Two Countries : In international trade, the price elasticity of demand is helpful in ascertaining the ‘terms of trade’. If exports have inelastic demand, a higher price can be charged from abroad. Similarly, if imported goods have elastic demand in the domestic market, a lower price is to be fixed. Both these enable a country to have favourable ‘terms of trade’ in respect of international trade.

(x) Determination of Rates of Foreign Exchange : In order to determine the foreign exchange rates for domestic currency, the government must keep in mind the elasticity of demand for its exports and imports. This will help the government to know the potential effects of devaluation or re-evaluation of its currency with respect to foreign currencies. If the government devalues the currency without carefully studying the elasticity of demand and demand for the country’s exports, then it cannot be successful in achieving its goal.

(xi) For Price Control Policy : In undeveloped countries like India, the price control policy can be adopted only after assessing the value of strategic goods demand. In terms of low-level items with elasticity or redundant demand, price control is usually used.

(xii) For Tariff Policy : Imposition of tariff raises the prices of domestic goods. The extent to which the internal price rises, depends on the elasticity of demand of the protected goods. If the demand for the protected goods is elastic, their sales will be reduced with the rise in prices. On the contrary, if the demand is less elastic, people will have to bear the burden of higher prices as a result of the tariff policy.

(xiii) Incidence of Taxation : Incidence of tax lies on the person who ultimately pays the tax. The incidence is on the buyer. If demand is perfectly inelastic, he will go on buying, as much as before, despite the price rise. The government has to keep in mind the ultimate burden of the tax, which depends on the elasticity of demand of the commodity taxed. If necessities, which have less elastic demand, are taxed, the burden will fall more on the poor section of society.