Uses of the YED

Question 1

Sales forecasting

Answer 1

A firm can forecast the impact of a change in income on sales volume (Q) and sales revenue (P X Q)

Question 2

Pricing policy

Answer 2

Knowing YED helps the firm decide whether to raise or lower price following a change in consumer’s income. If incomes are falling and YED is positive, a reduction in price might help compensate for the reduction in demand

Question 3

What are the two uses of the YED

Answer 3

Sales forecasting
Pricing policy
Diversification

Question 4

Diversification

Answer 4

Firms can diversify and offer a range of goods with different YEDs tp spread the risks associated with changes in the level of national income. Eg. A car manufacturer may produce cars with a range of YED values so that sales are stabilizes as the economy grows and declines