a. Distinguish between the following pairs of concepts i. elastic demand and inelastic demand ii. Income elasticity of demand and cross elasticity of demand...

Answer Details

a.

i. Elastic demand refers to a situation where a small change in price results in a large change in the quantity demanded. This means that consumers are highly sensitive to price changes, and a small increase in price can cause a significant decrease in the quantity demanded. In contrast, inelastic demand refers to a situation where a change in price does not significantly affect the quantity demanded. This means that consumers are not very sensitive to price changes, and a small increase in price may only cause a small decrease in the quantity demanded.

ii. Income elasticity of demand measures the responsiveness of the quantity demanded of a product to a change in consumer income. If the income elasticity of demand is positive, it means that the product is a normal good, and as consumer income increases, the quantity demanded also increases. If the income elasticity of demand is negative, it means that the product is an inferior good, and as consumer income increases, the quantity demanded decreases. Cross elasticity of demand measures the responsiveness of the quantity demanded of one product to a change in the price of another product. If the cross elasticity of demand is positive, it means that the two products are substitutes, and an increase in the price of one product will lead to an increase in the quantity demanded of the other product. If the cross elasticity of demand is negative, it means that the two products are complements, and an increase in the price of one product will lead to a decrease in the quantity demanded of the other product.

b.

i. If the demand for a product is price elastic, an increase in price will result in a decrease in the quantity demanded by a greater proportion. This means that the total revenue of the producer will decrease, as the increase in price will not be enough to offset the decrease in the quantity demanded. This can be illustrated using a downward-sloping demand curve, where the increase in price causes the quantity demanded to move along the demand curve to a lower quantity.

ii. If the demand for a product is price inelastic, an increase in price will result in a decrease in the quantity demanded by a smaller proportion. This means that the total revenue of the producer will increase, as the increase in price will be enough to offset the decrease in the quantity demanded. This can be illustrated using a steeply sloping demand curve, where the increase in price causes the quantity demanded to move along the demand curve to a slightly lower quantity, resulting in a net increase in total revenue.