(a) Distinguish between the following pairs of concepts: (i) elastic demand and inelastic demand (ii) income elasticity of demand and cross elasticity of de...

Answer Details

(a)

1. Elastic demand refers to a situation where a change in price leads to a significant change in the quantity demanded of a good or service. In other words, consumers are sensitive to price changes and are willing to buy more or less of the good or service depending on the price. On the other hand, inelastic demand occurs when a change in price does not significantly affect the quantity demanded. Consumers are less sensitive to price changes and will continue to buy the same amount of the good or service, regardless of the price.
2. Income elasticity of demand measures the responsiveness of demand for a good or service to a change in consumer income. It shows how changes in income affect the quantity demanded of a good or service. Cross elasticity of demand, on the other hand, measures the responsiveness of demand for one good or service to a change in the price of another good or service. It shows how changes in the price of one good affect the demand for another good.

(b)

1. If the demand for a product is price elastic, an increase in price will result in a decrease in the quantity demanded. As a result, the total revenue of the producer will decrease, as shown in the diagram below:



2. If the demand for a product is price inelastic, an increase in price will result in a smaller decrease in the quantity demanded. As a result, the total revenue of the producer will increase, as shown in the diagram below:

In both cases, the producer must weigh the potential impact on total revenue before deciding to increase the price of their product.