Explain how the concept of elasticity guides decisions in the following situations:

a. Government's tax on policy on household consumption's,

b. Devaluation policy to encourage exports and discourage imports.

a.

In this situation, the government needs to take into consideration the price elasticity of demand for the products or services that will have a price increase due to tax policy. It is very important to know this since the imposition of a policy that will increase taxes on products or services can affect negatively the producers of those goods. This can occur if the products or services included in the tax policy are price elastic. In other words, the demand for those products is highly responsive and any increase in their price will cause a significant decrease in their demand. Therefore, it is essential to know the price elasticity of demand in order not to cause unfavorable results in society.

b.

In this situation, the government needs to take into account the price elasticity of demand. A devaluation of the currency means that the value of the home currency decreases relative to foreign currencies. This will bring positive effects to the exporters; however, consumers might be affected since foreign goods (imports) become more expensive. Based on this, the government needs to include in the analysis of the price elasticity of the goods and services that will have this increase in prices due to the devaluation of the home currency. If the goods and services are highly inelastic such as medicines or essential goods, the increase in prices might hurt the local consumers and the economy as a whole.