d) elasticities to firms and governments

• define the revenue rule for PED

• to maximise their revenue, firms should

  • increase the price of price inelastic goods

  • decrease the price of price elastic goods

• explain how knowledge of YED helps firms maximise their profits

• when real consumer income decreases

  • increase the supply of inferior goods

  • decrease the supply of normal goods

• when real consumer income increases

  • decrease the supply of inferior goods

  • increase the supply of normal goods

• explain how knowledge of XED helps firms maximise their profits

• firms adjust the prices of their complementary and substitute goods

  • to maximise the profit gained from the other

  • to maintain their profit when competitors change the prices of their complementary and substitute goods

• explain how knowledge of PED helps governments impose taxes and subsidies

• governments can

  • tax price inelastic goods while maintaining a firms profit

  • subsidise price elastic goods to maximise a firms profit