Question

1. Explain the difference between price elasticity of demand and income elasticity of demand. 2. If demand is elastic, how will an increase in price change total revenue?

Answer 1

1. Price elasticity of demand is defined as the change in quantity demanded for a change in price of a good. Income elasticity of demand is defined as the change in quantity demanded for a change in Income. So, price elasticity is response of a good for change in price while income elasticity is response for a change in income

2. For an elastic demand good, people would purchase more for a reduced price and purchase less for an increased price. So the total revenue would get reduced for an increased price.