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Price Elasticity of Demand
A Primer on the Price Elasticity of Demand
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The Price Elasticity of Demand (commonly known as just price elasticity) measures the rate of response of quantity demanded due to a price change. The formula for the Price Elasticity of Demand (PEoD) is:PEoD = (% )/(% Change in Price)Calculating the Price Elasticity of DemandYou may be asked the question "Given the following data, calculate the price elasticity of demand when the price changes from $9.00 to $10.00" Using the chart on the bottom of the page, I'll walk you through answering this question.
(Your course may use the more complicated Arc Price Elasticity of Demand formula. If so you'll need to see the article on )First we'll need to find the data we need. We know that the original price is $9 and the new price is $10, so we have Price(OLD)=$9 and Price(NEW)=$10. From the chart we see that the quantity demanded when the price is $9 is 150 and when the price is $10 is 110. Since we're going from $9 to $10, we have QDemand(OLD)=150 and QDemand(NEW)=110, where "QDemand" is short for "Quantity Demanded". So we have:Price(OLD)=9Price(NEW)=10QDemand(OLD)=150QDemand(NEW)=110To calculate the price elasticity, we need to know what the percentage change in quantity demand is and what the percentage change in price is. It's best to calculate these one at a time.Calculating the Percentage Change in Quantity DemandedThe formula used to calculate the percentage change in quantity demanded is:[QDemand(NEW) - QDemand(OLD)] / QDemand(OLD)By filling in the values we wrote down, we get:
[110 - 150] / 150 = (-40/150) = -0.2667We note that % Change in Quantity Demanded = -0.2667 (We leave this in decimal terms. In percentage terms this would be -26.67%). Now we need to calculate the percentage change in price.Calculating the Percentage Change in PriceSimilar to before, the formula used to calculate the percentage change in price is:[Price(NEW) - Price(OLD)] / Price(OLD)By filling in the values we wrote down, we get:[10 - 9] / 9 = (1/9) = 0.1111We have both the percentage
demand and the percentage change in price, so we can calculate the price elasticity of demand. Final Step of Calculating the Price Elasticity of DemandWe go back to our formula of:PEoD = (% Change in Quantity Demanded)/(% Change in Price)We can now fill in the two percentages in this equation using the figures we calculated earlier.PEoD = (-0.2667)/(0.1111) = -2.4005When we analyze price elasticities we're concerned with their absolute value, so we ignore the negative value. We conclude that the price elasticity of demand when the price increases from $9 to $10 is 2.4005.How Do We Interpret the Price Elasticity of Demand?A good
is not just interested in calculating numbers. The number
in the case of price
of demand it is used to see how sensitive the demand for a good is to a price change. The higher the , the more sensitive consumers are to price changes. A very high price elasticity suggests that when the price of a good goes up, consumers will buy a great deal less of it and when the price of that good goes down, consumers will buy a great deal more. A very low price elasticity implies just the opposite, that changes in price have little influence on demand.Often an assignment or a test will ask you a follow up question such as "Is the good price elastic or inelastic between $9 and $10". To answer that question, you use the following rule of thumb: If PEoD & 1 then Demand is Price Elastic (Demand is sensitive to price changes) If PEoD = 1 then Demand is Unit Elastic If PEoD & 1 then Demand is Price Inelastic (Demand is not sensitive to price changes)Recall that we always ignore the negative sign when analyzing price elasticity, so PEoD is always positive. In the case of our good, we calculated the price elasticity of demand to be 2.4005, so our good is price elastic and thus demand is very sensitive to price changes.Next:
DataPriceQuantity DemandedQuantity Supplied$720050$818090$9150150$10110210$1160250
Price Elasticity of DemandAccessibility links
Ed Straw: The revolutionary brother
By Alex Hunt
Politics editor, BBC News Online
Ed Straw, brother of long-serving Labour cabinet minister Jack, is fed up with the way the UK is governed and says it's time for a revolution. It's the little things which show how bad things are - the traffic jam on the same stretch of the M25 every day for year after year, the extortionate price of buying ink for printers or the lengthy closure of a Tube line.Ed Straw, once an adviser to ex-Labour leader John Smith and a former head of Relate and the Demos think-tank, has had enough.The man who started delivering leaflets aged six, and who shared a stage with Harold Wilson when leader of Manchester University's students' union in 1970, used to think that voting was a civic duty.But after years of seeing governments in the UK and elsewhere fail he began to wonder if the non-voters were "the only rational people amongst us", avoiding the "flawed world of hope and disappointment, of vision and frustration".
His view, informed by working on some of the public sector reforms of the Thatcher and Blair governments, is that it is the system, rather than the politicians or parties, which is at fault.As an organisational specialist - he spent years as a consultant for what is now PwC - he says Britain has changed over recent decades in all sorts of ways, from the range of food on offer to people's "emotional literacy".But the system of government has remained "not so different in its performance and complacency to the extinct motor car industry of the 1970s".
Britain has changed a lot since the days when Mini Metros were being built at Longbridge, he says
There are plenty of people who are fed up with the way the country's run. What makes his view more interesting is his experience and who his brother is.Jack Straw was one of the senior figures in the Labour government from 1997 to 2010, serving as Home Secretary, Foreign Secretary and Justice Secretary. He is a man who was long ago described as a "politician to his fingertips".Meeting Ed, who is a couple of years younger, it's easy to see the family resemblance, though he sounds rather more like Ken Livingstone.In his book -
- he cautions that "for some curious reason people assume that you must be party to your close relative's thinking and decisions".'Total sacrifice'But, he adds: "In terms of knowing his mind, no top politician - especially one who survived in the cabinet for 13 years - says any more to anyone than is absolutely necessary. Every word can be a hostage to fortune... my knowledge of his specific actions was strictly limited... he did not read this book before publication."Which in some respects is probably a good thing. Ed Straw does not hold back with his views on either the last Labour government or politicians in general.Being a politician, he says, "requires the total sacrifice of the rest of your life - this is a very, very slippery pole and only those that put everything else secondary climb that pole".The result is: "You have to be seriously unbalanced to go into that world. The truth of the matter is that in any of these top jobs - in politics, corporations, the police or the public sector - typically you'll find the people who get them are the most driven. The person who wants it, needs it most."He adds that he would rather have people in power who had the right answers, rather than because they wanted the power.Ed Straw at a glance:Age: 65 Educated: Manchester University, Harvard, Oxford UniversityConsultant: PwC director, and worked on Thatcher and Blair governments' public sector reforms
The late Labour leader John Smith
Labour: Produced a restructuring report for John Smith when he was leaderOther: Was head of marriage guidance organisation Relate and the centre-left Demos think tankFrom the archives: "It reminded me of the school in the film If. There was a lot of bullying, emotional as well as physical. The way my brothers and I spoke and the fact we came from a council estate certainly didn't count in our favour." (From the Daily Mail - talking in 1998 about being a scholarship boy at Brentwood public school) What about Jack?"In the end it is about the system rather than the people. He got into the system. He wanted the power. He did some good, I think, but at the end of the day what he could do was very limited by the system and what the system enabled you to do."Ed was a student politician himself - Gordon Brown's future chief whip Nick Brown helped him get elected to the helm of Manchester student union four decades ago - but decided to "pursue a different path"."I couldn't be a politician - I'd last about six months. I'm far too inclined to speak my mind, or the truth as I see it."It sounds like there could be a lively discussion or two over the family dining table. But he bursts that vision by saying: "We don't talk politics. He's endlessly nagged - so when he's with the family we can give him time off."There is also a next-generation Straw hoping to become an MP next year - Jack's son Will. He's been sent a copy of the book: "I'm waiting to hear back from him to hear if he's seen the light."The thrust of Ed Straw's book is that the current system of government is too adversarial, fails to include any feedback on whether policies have succeeded, gives little choice to voters and suffers from a civil service which hampers politicians' attempts to get things done."Between elections, the places where power resides are the news media running their various agendas, good and bad, political and business - large companies and industries with expert preferential lobbyists and party funders, dealing with a political and civil service class mostly ignorant of their business," he says.He says governments "limp on with a mixture of muddle, error, howlers and the occasional success" and politicians "rarely work out before getting power that it's bust".Civil service reform needs to be a day-one issue for any new government, he says. So does he approve of Cabinet Office minister Francis Maude's efforts to reform it?Jack Straw at a glance:Age: 68Political career: MP since 1979, home secretary, foreign secretary, justice secretary during Labour governmentFrom the archives:
"Well, it was the most serious decision I've ever had to take and I wouldn't wish it on my worst enemy. Bear in mind what my family felt. It wasn't as though the arguments weren't being tested." Did you have rows? "No, we had discussions. It was too serious to have a row about." ( in 2012 about his memoir Last Man Standing)He says he does, and that a report he wrote in 2005 for the Demos think tank called The Dead Generalist may even have influenced the coalition's policy.But - isn't there always a but - he says Francis Maude is joining him and "a long line of people" who have attempted to reform the civil service and failed. He says he has come to the conclusion that the civil service cannot be reformed on its own, because reform would involve transferring more power to the government, which would "make it worse because they have too much power already".So his solution is a revamp of the whole system of government.The better-known reforms that he wants to see include proportional representation and state funding of political parties - with a ban on large donations - to promote competition among parties and make sure that individuals or interests cannot buy influence.Swiss-style referendums would be held on a more regular basis, while governments would be limited to four-year terms and prime ministers not allowed to serve more than eight years (to stop the "autocracy cap" where a leader with pretty much unchecked power becomes autocratic and "wants to stay for ever because you can't imagine life without that power").Lessons from Scotland - Ed Straw's view"To the delight of all those who know our system has an incurable and terminal condition, the Scottish referendum has released the pent-up demand for good government. At last. But the debate is collecting around the trading of constitutional artefacts."English votes for English laws is the neat trap laid by the Conservatives - into which Labour has
obligingly stepped. Hard to argue with, but by how much would the application of this principle alone improve our quality of lives?"Regional government for England is trading well. Good. But are people going to vote for another layer of high-cost, low-quality, detached government - without its transformation first? Devolution to cities is another - great. But today's local authorities have as many fault lines as the centre, and 90% of the power is exercised by officials. Executive mayors are a big step in the right direction but far from all that is needed to produce flourishing and effective real local government. "Scotland has shown how parched minds respond to drinking at the well of active and equal engagement in constitutional concepts, previously sanctioned as too weighty for the commoner."His more radical ideas are based around bringing in new feedback systems into the working of governments.He likens government at present to a gardener planting seeds, telling people what the garden will look like but then never actually checking whether or not they have grown as planned (instead spending lots of time checking on the sharpness of a spade or the water efficiency of a hose).That is in contrast to the private sector, which checks on the outcomes of spending continually. A similar discipline needs to come into government, he says. There has been progress with the National Audit Office, the Office for National Statistics and select committees, he says, but he wants them all brought under the umbrella of the second chamber (the House of Lords at the moment) becoming a "Resulture" able to score policies and kill off those ones
which are not working.The civil service would be radically revamped with it retaining a smaller administrative role, but in other areas there would no longer be a permanent civil service. Instead specialists with knowledge of, say, the railways, would be brought in to contract, manage and regulate that industry.One example he gives of how government policy went along without getting proper feedback from voters or experts was immigration policy under the last Labour government.As he puts it, there was a conscious decision to allow mass immigration to tackle the "dependency ratio" (the fact there were increasingly more older people per working-age person) largely to ensure the country could afford public sector pensions in the years ahead.This led to a "virtuous circle" in the chancellor's mind where large scale immigration "would pay for the growth in the ageing population and its future pension cost" while locals who lost out to foreign workers could have their benefits paid using the higher tax revenues from the growing economy.
The way of replacing a Labour leader need changing, Ed Straw says
It ignored the impact on congestion, infrastructure, public services, house prices and social housing and what it means to be British, he says. "But whilst government ignored the inconvenient variables, in their lives the public noticed them."Ed Straw says that his application of organisational theory onto how the UK government works is unique. He has also got strong views on the Labour Party's structure.Back in 1992/3 he produced a report for the then Labour leader John Smith which ended up as a blueprint for a restructuring of the party.He says Mr Smith took up parts of it before his death and Tony Blair "took it up in spades", such as the need for rebuttal and the idea of a change of name.But there are still changes needed. He says a lot of Labour's problems could have been avoided if they had a better process for challenging or replacing a leader, saying the Conservative system is much more efficient.It would have allowed Mr Blair to be removed before the 2005 election, for Gordon Brown to have gone within a year of taking office and John Smith to have led Labour in 1992 rather than Neil Kinnock, he says. But whatever the changes within parties, he says that successive governments have shown that nothing much will change without the wider reforms he is suggesting.
Ed Straw's revolution would be rather different to the French version
He wants established parties to sign up to his programme of government, although reading his proposals there might be an element of "turkeys voting for Christmas" if they do. He has sent his book to Nigel Farage, whose UK Independence Party backs the idea of policy referendums, but has yet to hear back.The question is what happens if nothing changes. Ed Straw issues what he describes as a "call to arms" saying that if none of the existing parties adopt his proposals it is time "to get agitating" adding that "it takes a 'burning platform' to get an organisation's people to shift".But before concluding that he is advocating the type of bloody revolution seen in years past in France and China, think again. His goal is that, if the establishment refuses to take on board his ideas, he will create his own party with the aim of getting elected on a pledge to bring in all the changes via a referendum and then disband within two years and let "the regular parties resume power in a system that now functioned".As he said, in his view it's not the people it's the system.
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