YED

Why is YED important?

It can provide businesses crucial information regarding the relationship of demand for the goods they are producing and income, as well as wether they are normal or inferior goods. This allows them prepare for expected booms or recessions in an economy.

What should a business do if it has a YED of +4 and a boom is expected?

A YED of +4 means that it ids a luxury good, and therefore if a boom is expected then demand will be expected to increase as well. Therefore they must prepare by increasing its level of stocks, output and employment to meet this higher demand.

What should a firm do if it has a YED of -4 and a boom is expected?

A YED of -4 means, the good is an inferior good. And so if a boom is forecast then demand for the inferior good is likely to decrease. And so the firm must prepare by decreasing its level of stocks, output and employment. Therefore the firm may look for other ways to stimulate demand for example through advertising or brand develop,ent to reduce the impact of lower demand.

What is are criticisms of using elasticity for business decision making?

• Elasticity calculations are only estimates. The surveys they have been collected from may be inaccurate or unrepresentative and therefore solely using this information could be dangerous for the company. Therefore it should be used as a guide alongside other important data sources when making business decisions.

• The assumption of ceteris paribus can be misleading as there are many other factors which can affect both supply and demand, for example things such as fashion and tastes.

• Elasticity varies along the demand curve, and therefore businesses must be careful not to generalise elasticity values to all change in price.