Using formulas, distinguish between price elasticity of demand and income elasticity of demand

 

Price elasticity	Income elasticity
1. (Equation)  Price elasticity of demand = (percentage change in quantity demanded) / (percentage change in price).	1. (Equation)  Income elasticity of demand = (percentage change in quantity demanded) / (percentage change in income).
2. Quantity demanded is always negatively related to the price, which makes the price elasticity of demand a negative number mathematically.	2. For  normal goods, the quantity demanded increases when income increases. Therefore, the income elasticity is positive.
3. In economics, we often ignore the negative sign and represent the elasticity as a positive number.	3. For inferior goods, the quantity demanded decreases when income increases. Therefore, the income elasticity is negative.
4. When price is high and quantity demanded is low, the demand is elastic. If price increases, total revenue decreases.	4. Among normal goods, for necessities, income elasticity is small because they are necessary to our lives and people still need them even though the income is low.
5. Elasticity changes at different prices along the linear demand curve.	5. For luxuries, income elasticity is large because people can choose not to buy them if their income is low
6. When price is low and quantity demanded is high, the demand is inelastic. If price increases, total revenue increases.	6. Income elasticity of demand measures the responsiveness of quantity demanded to the change of income.

State, if any, the expectation of the law of demand

 The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will consume that good. In other words, the higher the price, the

lower the quantity demanded. This principle is illustrated when                        

 a) Company A has a monopoly over the widget market so an increase in widget price has little effect on the quantity demanded.

b) A manufacturer of luxury cars noticed that its customer base is relatively unresponsive to changes in price.

c) A city experiences an increase in both gasoline prices and the number of people taking public transportation.

d) An increase in the number of computer retailers led to decrease in the average price of computers.

e) A reduction in the price of oranges from $2 per pound to $1 per pound results in 75 pounds of oranges being sold as opposed to 50 pounds.

what is meant by the phrase “other things remaining the same” used by the law?

 By the phrase “other things remaining the same”, law of demand assumes the following:

•     Consumer’s income, tastes and preferences are constant.

 •     Prices of substitutes and complements do not change.

 •     There are no new substitutes for the goods under consideration.

•     People do not speculate on prices. It means that if price of the commodity in question falls, people will not wait for further decline in prices.

 •     The commodity under consideration does not have prestige value.

 

The law of demand will not work as expected if any one of the aforementioned assumptions is violated.

What is the law of demand? Explain the law with the help of a diagram?

A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease and vice versa.

 

This law summarizes the effect price changes have on consumer behavior. For example, a consumer will purchase more pizzas if the price of pizza falls. The opposite is true if the price of pizza increases.

 

Explanation:

In ordinary language the word demand means desire. But in economics demand means desire backed up by the enough money to pay for the good. Only desire can not be called demand. There is also functional relationship between price and demand. Second point is that demand is always per unit of time.

 

 

LAW OF DEMAND: -”Other things remaining the same when the price of any commodity increases its demand falls and when price falls its demand increases."

According to the law of demand there is inverse relationship between demand and price.

In simple language was can say that when the price of any commodity falls, people are tempted to purchase more commodities. On the other hand when price of any commodity rises people

demand less quantity.