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 and decrease the price of price elastic goods

• explain how knowledge of YED helps firms maximise their profits

• it allows them to increase the supply of inferior goods when real income decreases

• and to increase the supply of normal goods when real income increases

• explain how knowledge of XED helps firms maximise their profits

• it allows them to change the prices of their complementary and substitute goods

  • to increase the profit gained from the other

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

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

• it allows them to tax price inelastic goods while maintaining a firms profit

• and to subsidise price elastic goods to increase their quantity demanded to maximise a firms profit