Q1. Distinguish between price elasticity of demand and income elasticity of demand. How will you judge the quality of a good on the basis of value of income elasticity of demand? The demand curve and the supply curve of the product is given as under: Qd=300-2P+4I Qs=3P-50 Where I is the average income measured in thousands of rupees, P is the price of the product, Qd is the quantity demanded and Qs is the supply of the product. Find out the market clearing price and the quantity demanded if I=25.
- (i)) Distinguish between price elasticity of demand and income elasticity of demand. How will you judge the quality of a good on the basis of value of income elasticity of demand? (250 words)
- (ii)) The demand curve and the supply curve of the product is given as under: Qd=300-2P+4I Qs=3P-50 Where I is the average income measured in thousands of rupees, P is the price of the product, Qd is the quantity demanded and Qs is the supply of the product. Find out the market clearing price and the quantity demanded if I=25. (250 words)
- Price Elasticity of Demand (PED) measures demand change due to price change (%ΔQd / %ΔP).
- Income Elasticity of Demand (YED) measures demand change due to income change (%ΔQd / %ΔY).
- Positive YED (YED > 0) indicates a normal good, where demand increases with income.
- Normal goods are necessities (0 < YED < 1) or luxuries (YED > 1).
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