d) elasticities to firms and governments

e) the significance of elasticities of demand to firms and governments in terms of: the imposition of indirect taxes and subsidies, changes in real income, changes in the prices of substitute and complementary goods

f) the relationship between price elasticity of demand and total revenue (including calculation)

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

for firms attempting to maximise their profit

• knowledge of YED

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

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

• knowledge of XED

  • 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

for governments

• knowledge of PED

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

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