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

(a)(i) Elastic vs inelastic demand.

(a)(ii) Income elasticity vs cross elasticity of demand.

• Income elasticity of demand measures the responsiveness of quantity demanded of a good to a change in consumers' income: \[ e_y = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in income}} \]
• Cross elasticity of demand measures the responsiveness of quantity demanded of one good (X) to a change in the price of another good (Y): \[ e_{xy} = \frac{\% \text{ change in quantity demanded of X}}{\% \text{ change in price of Y}} \] It is positive for substitutes and negative for complements.

(b) Effect of a price increase on total revenue. Total revenue is \( TR = P \times Q \).

• (i) If demand is price elastic: a rise in price causes a larger proportionate fall in quantity demanded, so total revenue falls. On a diagram, the demand curve is fairly flat (gentle slope); the revenue lost from selling far fewer units outweighs the revenue gained from the higher price.
• (ii) If demand is price inelastic: a rise in price causes only a small proportionate fall in quantity demanded, so total revenue rises. On a diagram, the demand curve is fairly steep; the higher price more than makes up for the small drop in sales.

Examination reminder: the second part of (b) reads "price elastic" twice in the paper, but the intended contrast is elastic versus inelastic, which is answered above.