Interest is defined as the cost of borrowing money, and depending on how it is

calculated, can be classified as simple interest or compound interest.

Simple interest is calculated on the principal, or original, amount of a loan. Compound

interest is calculated on the principal amount and also on the accumulated interest of previous
periods, and can thus be regarded as “interest on interest.”

There can be a big difference in the amount of interest payable on a loan if interest is
calculated on a compound rather than simple basis. On the positive side, the magic of
compounding can work to your advantage when it comes to your investments and can be a
potent factor in wealth creation.

While simple and compound interest are basic financial concepts, becoming thoroughly
familiar with them will help you make better decisions when taking out a loan or making
investments, which may save you thousands of dollars over the long term.

Basic Practical Examples

Simple Interest

The formula for calculating simple interest is:

Simple Interest = Principal x Interest Rate x Term of the loan

=Pxixn

Thus, if simple interest is charged at 5% on a $10,000 loan that is taken out for a three-year
period, the total amount of interest payable by the borrower is calculated as: $10,000 x 0.05 x
3 = $1,500.

Interest on this loan is payable at $500 annually, or $1,500 over the three-year loan term.

Compound Interest

The formula for calculating compound interest in a year is:

Compound Interest = Total amount of Principal and Interest in future (or Future Value) less
Principal amount at present (or Present Value)

= [P (1 + i)n] – P

= P [(1 + i)n – 1]

where P = Principal, i = annual interest rate in percentage terms, and n = number of

compounding periods for a year.

Continuing with the above example, what would be the amount of interest if it is charged on a
compound basis? In this case, it would be: $10,000 [(1 + 0.05)3 – 1] = $10,000 [1.157625 –
1] = $1,576.25.
While the total interest payable over the three-year period of this loan is $1,576.25, unlike
simple interest, the interest amount is not the same for all three years because compound
interest also takes into consideration accumulated interest of previous periods. Interest
payable at the end of each year is shown in the table below.

Compounding Periods

When calculating compound interest, the number of compounding periods makes a

significant difference. Generally, the higher the number of compounding periods, the greater
the amount of compound interest. So for every $100 of a loan over a certain period, the
amount of interest accrued at 10% annually will be lower than interest accrued at 5% semi-
annually, which will, in turn, be lower than interest accrued at 2.5% quarterly.

In the formula for calculating compound interest, the variables “i” and “n” have to be
adjusted if the number of compounding periods is more than once a year.

That is, within the parentheses, “i” has to be divided by "n," number of compounding periods
per year. Outside of the parentheses, “n” has to be multiplied by "t," the total length of the
investment.

Therefore, for a 10-year loan at 10%, where interest is compounded semi-annually (number
of compounding periods = 2), i = 5% (i.e. 10% / 2) and n = 20 (i.e.10 x 2).

To calculate total value with compound interest, you would use this equation:

= [P (1 + i/n)nt] – P

= P [(1 + i/n)nt – 1]

where P = Principal, i = annual interest rate in percentage terms, n = number of compounding

periods per year, and t = total number of years for the investment or loan.

The following table demonstrates the difference that the number of compounding periods can
make over time for a $10,000 loan taken for a 10-year period.

Compounding Frequency No. of Compounding Periods Values for i/n and nt Total Interest

Annually 1 i/n = 10%, nt = 10 $15,937.42

Semi-annually 2 i/n = 5%, nt = 20 $16,532.98

Quarterly 4 i/n = 2.5%, nt = 40 $16,850.64

Monthly 12 i/n = 0.833%, nt = 120 $17,059.68

Index Numbers: Methods of Construction of Index

Number!
An index number is a statistical derives to measure changes in the value of money. It is a
number which represents the average price of a group of commodities at a particular time in
relation to the average price of the same group of commodities at another time.

Professor Chandler defines it thus: “An index number of prices is a figure showing the height
of average prices at one time relative to their height at some other time that is taken at the
base period.” To understand the meaning of the term index number, three points are to be
noted.

First, an average figure relates to a single group of commodities. But the various items in the
group are expressed in different units. For example, a consumer price index contains such
diverse items as food, clothing, fuel and lighting, house rent, and miscellaneous things. Food
consists of wheat, ghee, etc. expressed in kgs. cloth is expressed in metres, and lighting in
kws.

An index number expresses the average of all such diverse items in different units. Second,
an index number measures the net increase or decrease of the average prices for the group
under study. For instance, if the consumer price index has increased from 150 in 1982 as
compared to 100 in 1980, it shows a net increase of 50 per cent in the prices of commodities
included in the index. Third, an index number measures the extent of changes in the value of
money (or price level) over a period of time, given a base period. If the base period is the
year 1970, we can measure change in the average price level for the preceding and
succeeding years.

Methods of Construction of Index Number:

In constructing an index number, the following steps should be noted:

1. Purpose of the Index Number:

Before constructing an index number, it should be decided the purpose for which it is needed.
An index number constructed for one category or purpose cannot be used for others. A cost
of living index of working classes cannot be used for farmers because the items entering into
their consumption will be different.
2. Selection of Commodities:

Commodities to be selected depend upon the purpose or objective of the index number to be
constructed. But the number of commodities should neither be too large nor too small.

Moreover, commodities to be selected must be broadly representative of the group of

commodities. They should also be comparable in the sense that standard or graded items
should be taken.

3. Selection of Prices:

The next step is to select the prices of these commodities. For this purpose, care should be
taken to select prices from representative persons, places or journals or other sources. But
they must be reliable. Prices may be quoted in money terms i.e. Rs. 100 per quintal or in
quantity terms, i.e. 2 kg. per rupee. Care should be taken not to mix these prices. Then the
problem is to select wholesale or retail prices. This depends on the type of index number. For
a consumer price index, wholesale prices are required, while for a cost of living index, retail
prices are needed. But different prices should not be mixed up.

4. Selection of an Average:

Since index numbers are averages, the problem is how to select an appropriate average. The
two important averages are the arithmetic mean and geometric mean. The arithmetic mean is
the simpler of the two. But geometric mean is more accurate. However, the average prices
should be reduced to price relatives (percentages) either on the basis of the fixed base method
or the chain base method.

5. Selection of Weights:

While constructing an index number due weightage or importance should be given to the
various commodities. Commodities which are more important in the consumption of
consumers should be given higher weightage than other commodities. The weights are
determined with reference to the relative amounts of income spent on commodities by
consumers. Weights may be given in terms of value or quantity.

6. Selection of the Base Period:

The selection of the base period is the most important step in the construction of an index
number. It is a period against which comparisons are made. The base period should be
normal and free from any unusual events such as war, famine, earthquake, drought, boom,
etc. It should not be either very recent or remote.

7. Selection of Formula:

A number of formulas have been devised to construct an index number. But the selection of
an appropriate formula depends upon the availability of data and purpose of the index
number. No single formula may be used for all types of index numbers.
We give below an example each of the simple price index and the weighted price index.

Simple Price Index:

To construct a simple price index, compute the price relatives and average them. Add the
price relatives and divide them by the number of items. Table 64.1 illustrates the construction
of a simple index of wholesale prices.

TABLE 64.1

Commodity Prices in Base Prices in Price

1970(P0) 1980(P1) = Relatives
1970=100 P1/P0xl00
(R)
A Rs . 20 per 100 Rs. 25 125
kg
В 5 per kg 100 10 200
С 15 per 100 30 200
metre
D 25 per kg 100 30 120
E 200 per 100 450 225
quantal
N=5 500 ∑R = 870

Price index in 1980 = Prices in 1980 / Prices in 1970 x 100

Or ∑P1/P0 x 100 = 870/500 x 100 = 174

Using arithmetic mean, price index in 1980 = ∑R/N = 870/5 = 174

The preceding table shows that 1970 is the base period and 1980 is the year for which the
price index has been constructed on the basis of price relatives. The index of wholesale prices
in 1980 comes to 174. This means that the price level rose by 74 per cent in 1980 over 1970.

Weighted Price Index:

Taking the example of Table 64.2 already given, we assign high weights to commodities of
greater importance to consumers and low weights to commodities of lesser importance.

TABLE 64.2

CommodityWeight Prices Base Prices Price WxR

in 1970 in
(W) 1970 = 100 1980 Relatives
Rs Rs
(R)
A 6 20 100 25 125 750
В 4 5 100 10 200 800
С 2 15 100 30 200 400
D 4 25 100 30 120 480
E 10 200 100 450 225 2250
∑24 ∑WR =
4680

Using arithmetic mean, the weighted price index in 1980 = 4680/24 = 195.

The weighted price index is more accurate than the simple price index. In the example given
above, the weighted price index shows an increase of 91 per cent in the price level in 1980
over 1970 as against the increase of 74 per cent according to the simple price index.

What the Slope Means

The concept of slope is very useful in economics, because it measures the relationship
between two variables. A positive slope means that two variables are positively related—that
is, when x increases, so does y, and when x decreases, y decreases also. Graphically, a
positive slope means that as a line on the line graph moves from left to right, the line rises.
We will learn in other sections that “price” and “quantity supplied” have a positive
relationship; that is, firms will supply more when the price is higher.

Figure 1. Positive Slope

A negative slope means that two variables are negatively related; that is, when x increases, y
decreases, and when x decreases, y increases. Graphically, a negative slope means that as the
line on the line graph moves from left to right, the line falls. We will learn that “price” and
“quantity demanded” have a negative relationship; that is, consumers will purchase less when
the price is higher.

Figure 2. Negative slope

A slope of zero means that there is a constant relationship between x and y. Graphically, the
line is flat; the rise over run is zero.
Figure 3. Slope of Zero

The unemployment-rate graph in Figure 4, below, illustrates a common pattern of many line
graphs: some segments where the slope is positive, other segments where the slope is
negative, and still other segments where the slope is close to zero.

Figure 4. U.S. Unemployment Rate, 1975–2014

Calculating Slope

The slope of a straight line between two points can be calculated in numerical terms. To
calculate slope, begin by designating one point as the “starting point” and the other point as
the “end point” and then calculating the rise over run between these two points.

Figure 5. Altitude–Air Density Relationship

As an example, consider the slope of the air-density graph, above, between the points
representing an altitude of 4,000 meters and an altitude of 6,000 meters:

Rise: Change in variable on vertical axis (end point minus original point)

Run: Change in variable on horizontal axis (end point minus original point)

Thus, the slope of a straight line between these two points would be the following: from the
altitude of 4,000 meters up to 6,000 meters, the density of the air decreases by approximately
0.1 kilograms/cubic meter for each of the next 1,000 meters.

Suppose the slope of a line were to increase. Graphically, that means it would get steeper.
Suppose the slope of a line were to decrease. Then it would get flatter. These conditions are
true whether or not the slope was positive or negative to begin with. A higher positive slope
means a steeper upward tilt to the line, while a smaller positive slope means a flatter upward
tilt to the line. A negative slope that is larger in absolute value (that is, more negative) means
a steeper downward tilt to the line. A slope of zero is a horizontal flat line. A vertical line has
an infinite slope.

Suppose a line has a larger intercept. Graphically, that means it would shift out (or up) from
the old origin, parallel to the old line. If a line has a smaller intercept, it would shift in (or
down), parallel to the old line.
Equation of a line

The slope m of a line is one of the elements in the equation of a line when written in the
"slope and intercept" form: y = mx+b. The m in the equation is the slope of the line described
here,

Formula for the slope

Given any two points on the line, its slope is given by the formula

where:
Ax the x coordinate of point A
Ay the y coordinate of point A
Bx the x coordinate of point B
By the y coordinate of point B

It does not matter which point you choose for A or B. So long as they are both on the line
somewhere, the formula will produce the correct slope.

(not in syllabus) APPLICATIONS OF CONSUMER SURPLUS

n our last write-up we have seen what is meant by consumer surplus. Let us now

proceed towards the application of consumer surplus.

The government has to take many decisions and frame policies and here the concept

of consumer surplus is of help. We know that taxes are a source of revenue for the

government. We have to understand that the consumer surplus may not be same for the

different types of goods. Luxuries for instance may command a relatively higher consumer

surplus as for these commodities the consumers may get more surplus. So for luxuries, the

government could impose higher taxes and through this boost its revenue. Also those who are

well-off may enjoy more surplus than who are not and when luxuries are taxed higher, they

may not mind shelling out extra bucks for such goods. It means that the willingness of the
consumer to pay more could be seen than what they are really shelling out for the

commodity.

Secondly for the business houses, consumer surplus may be of help in price fixation.

Again here too, the prices of those commodities could be raised for which consumer surplus

is higher. This also follows the same reason as here too the consumers may be willing to pay

more then what they are actually paying. This is all the more beneficial to the businessman if

he has monopoly in the market.

Consumer surplus also helps us in understanding how certain facilities as well as

certain commodities are enjoyed by us at very less cost and the differences between these

kinds of surpluses enjoyed in different places helps us in comparing which place could be

better to live. It is due to availability of such facilities that the place may become more

suitable to live and that too at relatively less cost.

The aspect of international trade could also be looked from the consumer surplus

point of view. This is because it may happen at times that the goods which are from foreign

countries may be priced lower than goods which are domestic. Or to put in other words,

imported goods may be inexpensive than domestic goods. The surplus that the consumer

would derive would be higher if in place of domestic goods, imported goods are purchased by

the consumer. Such substitution of imported goods in place of domestic goods would lead to

higher consumer surplus simply because the level of satisfaction remains unchanged even

when the price paid is lower. Thus it could be concluded that international trade is supported

by consumer surplus.
 Each and every economy aims to grow and to have stable growth. Consumer surplus

also helps in evaluating the stability of an economy as higher surplus may point out better

performance of the economy and vice versa.

Consumer's Surplus:( in syllabus)

Definition and Explanation:

The concept of consumer’s surplus was introduced by Alfred Marshall. According to him:

"A consumer is generally willing to pay more for a given quantity of good than what he actually pays at
the price prevailing in the market".

For example, you go to the market for the purchase of a pen. You are mentally prepared to pay $25
for the pen which the seller has shown to you. He offers the pen for $10 only. You immediately
purchase the pen and say ‘thank you’.

You were willing to pay $25 for the pen but you are delighted to get it for $10 only. Consumer’s
surplus is the difference between the maximum amount a consumer is willing to pay for the good and
the price he actually pays for the good. In our example given above, the consumer’s surplus is $15
($25 – $10).

Demand Curve and Consumer’s Surplus:

The consumer surplus can be easily found out by consumer’s demand curve for the commodity and
the current market price which we assume a purchaser cannot change. In the words of Alfred
Marshall:

“The excess of the price which he (consumer) would be willing to pay rather than go without the thing
over that which he actually does pay is the economic measure of this surplus satisfaction”.

In the words of A. Koutsoyannis:

“Consumer’s surplus is equal to the difference between the amount of money that consumer actually
pays to buy a certain quantity rather than go without it”.
The concept of consumer’s surplus is the result of two important phenomena:

(i) Characteristic of consumer’s behavior.

(ii) Characteristic of market.

The characteristic of consumer’s behavior is that as he buys more and more of a particular
commodity, the marginal utility of the successive units begins to decrease. A rational buyer
continuous purchasing the commodity up to the unit which equates his marginal utility of the good to
the price he pays for it.

The second phenomenon is that there is perfect competition among sellers and a single price prevails
in the market for a particular commodity at a particular time. The buyer is able to get the first unit of
the commodity at the same price as the second or pay any other unit thereafter.

Schedule:

The concept of consumer’s surplus is now explained with the help of a schedule and a demand curve.

Quantity Willing to Pay ($) Price ($) Consumer’s Surplus

($)

1 25 10 15 = (25 – 10)

2 20 10 10 = (20 – 10)

3 15 10 5 = (15 – 10)

4 10 10 0

Total 75 10 x 4 = 40 30

Diagram/Figure:
In this figure 3.20, the individual demand curve DD/ shows the maximum amount a consumer is willing
to pay for each unit of the good. An individual is not willing to purchase any pen at a price of $30 per
month. He will, however, is willing to purchase one pen at a price of $20 per pen, he is willing to
purchase 2 pens. The surplus diminishes with the decline in the marginal utility of pens.

In case the price comes down to $15 per pen, the consumer purchases 3 pens. By using this demand
curve, we measure the surplus which a consumer gets from the purchase of pens. The current market
price of a pen $10, which we have assumed the purchaser cannot change. The consumer was willing
to pay $25 per pen but he actually pay $10 only, the consumer’s surplus for the first pen is $15 = (25
– 10).

For the second pen, it is $10 = (20 – 10) and for the third consumer’s surplus is $5 = (15 – 10).

There is no surplus on the fourth unit as the market price for the pen is the same what he would have
paid for the pen. The total consumer’s surplus from the purchase of four pens is $15 + $10 + $5 =
$30. It is the sum of surpluses received from each pen. The shaded area in the graph shows the total
consumer’s surplus.

Criticism:

The Marshallian concept of consumer’s surplus has been severally criticized by modern
economists Allen and Hicks. According to them, the concept is based on assumptions which are
unwarranted. Utility, according to them, is a psychological feeling. It cannot be exactly measured in
term of money.
In Marshallian analysis, the marginal utility of money is assumed to remain constant. The fact is that
when a consumer spends money on goods, his income decreases and the marginal utility of money to
him rises. Analysis ignores this basic fact.

Consumer’s surplus is said to be imaginary as it assumes that utilities derived from various goods are
independent. In real life, this is not true. The fact is that utilities derived from various goods are
independent.

Measurement of Consumer’s Surplus with the Help of Indifference

Curves (Hicksian Method):

Professor J.R. Hicks, has explained the concept of consumer surplus with the help of indifference
curve technique . According to Hicks when there is fall in the price of a commodity, it has two main
effects:

First, the consumer can purchase more of the good whose price has fallen.

Secondly, he can purchase the same quantity of the good as he was buying before but with a lesser
amount of money. He spares some money in the bargain. This is a form of rise in the real income of
the consumer.

Diagram/Figure:

The Hicksian method of measuring consumer’s surplus is now explained with the help of diagram
below.
In figure 3.20 commodity X is measured on OX axis and money income of an individual on OY axis.
We assume here that a consumer does not know the price of the commodity X and has OR quantity
of money. The indifference curve IC1 represents various combinations of income and X of commodity
X which yield the same level of satisfaction to the consumer.

The indifference curve IC1 originates from point R. It shows the stage when the consumer retains all
of his income and zero units of commodity for a given level of the utility. The consumer moves down
along the curve IC1. The consumer at point P buys OT amount of commodity X and has OE amount of
money income. In other words, the consumer is ready to sacrifice RE amount of money for getting OT
units of commodity X.

We now assume that the consumer is informed of the price of commodity X. The RL is the budget
line. The budget line touches the indifference curve IC 2 at point N which is the point of equilibrium.
The consumer now has the OT commodity of X and OF amount of income. He gives up RF amount of
money to buy OT units of commodity X. Previously he was ready to pay RE amount of income which
is higher than the amount he pays now. We infer from this that RE – RF i.e., FE is the consumer
surplus.

FE is the difference between the amount of income the consumer was willing to pay and what he
actually pays. The surplus has also shifted the consumer on the higher level of satisfaction from IC1 to
IC2.
Importance of Consumer’s Surplus:

The concept of consumer’s surplus has both theoretical as well as practical importance.

(i) Theoretical importance: The idea of consumer’s surplus reveals the benefits which we derive
from our purchase of the commodity in the market.

For example, when we purchase salt, or a match box, we are willing to pay the amount much higher
than their market value. For example, a consumer would be willing to pay $10 for a match box rather
than go without it but he actually pay Re one only on the purchase of a match box. Consumer’s
surplus on the purchase of match box thus is $ 9.0.

(ii) Practical importance: A monopolist can charge higher price for his product if the consumers are
enjoying large consumers surplus on the use of his product.

(iii) The inhabitants of a country derive consumer's surplus when they import commodities from
abroad. They are usually prepared to pay more for than what they actually pay.

(iv) A finance minister imposes taxes of the commodities yielding consumer's surplus.

(v) An entrepreneur before investing capital in a project evaluates the consumer's surplus to be
derived from it. If the benefits to the obtained are greater than the costs, the investment is undertaken.

What is 'Demand Elasticity'

Demand elasticity refers to how sensitive the demand for a good is to changes in other
economic variables, such as the prices and consumer income. Demand elasticity is calculated
by taking the percent change in quantity of a good demanded and dividing it by a percent
change in another economic variable. A higher demand elasticity for a particular economic
variable means that consumers are more responsive to changes in this variable, such as price
or income.
BREAKING DOWN 'Demand Elasticity'
Demand elasticity measures a change in demand for a good when another economic factor changes.
Demand elasticity helps firms model the potential change in demand due to changes in price of the
good, the effect of changes in prices of other goods and many other important market factors. A
grasp of demand elasticity guides firms toward more optimal competitive behavior and allows them
to make more precise forecasts of their production needs. If the demand for a particular good is
more elastic in response to changes in other factors, companies must be more cautions with raising
prices for their goods.

Types of Demand Elasticities

One common type of demand elasticity is the price elasticity of demand, which is calculated
by dividing the percent change in quantity demanded of a good by the percent change in its
price. Firms collect data on price changes and how consumers respond to such changes and
later calibrate their prices accordingly to maximize their profits. Another type of demand
elasticity is cross-elasticity of demand, which is calculated by taking the percent change in
quantity demanded for a good and dividing it by percent change of the price for another good.
This type of elasticity indicates how demand for a good reacts to price changes of other
goods.

Interpretation and Example of Demand Elasticity

Demand elasticity is typically measured in absolute terms, meaning its sign is ignored. If
demand elasticity is greater than 1, it is called elastic, meaning it reacts proportionately
higher to changes in other economic factors. Inelastic demand means that the demand
elasticity is less than 1, and the demand reacts proportionately lower to changes in another
variable. When a change in demand is proportionately the same as that for another variable,
the demand elasticity is called unit elastic.

Suppose that a company calculated that the demand for soda product increases from 100 to
110 bottles as a result of the price decrease from $2 to $1.50 per bottle. The price elasticity of
demand is calculated by taking a 10% increase in demand (10 bottles change divided by
initial demand of 100 bottles) and dividing it by a 25% price decrease, producing a value of
0.4. This indicates that lowering soda prices will result in a relatively small uptick in demand,
because the price elasticity of demand for soda is inelastic. Also, an increase in total revenue
will be smaller in this case compared to more elastic demand for soda.

the following equation enables PED to be calculated.

% change in quantity demanded/% change in price

The negative sign indicates that P and Q are inversely related, which we would expect for
most price/demand relationships. This is significant because the newspaper supplier can
calculate or estimate how revenue will be affected by the change in price. In this case,
revenue at £1.00 is £500,000 (£1 x 500,000) but falls to £300,000 after the price rise (£1.20 x
250,000).

The range of responses

The degree of response of quantity demanded to a change in price can vary considerably. The
key benchmark for measuring elasticity is whether the co-efficient is greater or less than
proportionate. If quantity demanded changes proportionately, then the value of PED is 1,
which is called ‘unit elasticity’.

PED can also be:

 Less than one, which means PED is inelastic.

 Greater than one, which is elastic.
 Zero (0), which is perfectly inelastic.
 Infinite (∞), which is perfectly elastic.

Responsiveness of Elasticity

Elasticity, on the other hand, aims to quantify the responsiveness of demand and supply to
changes in price, income, or other determinants of demand. Therefore, price elasticity of
demand answers the question "by how much does the quantity demanded of an item change
in response to a change in price?" The calculation for this requires changes in quantity to be
divided by changes in price rather than the other way around.

Formula for Price Elasticity of Demand Using Relative Changes

A percent change is just an absolute change (i.e. final minus initial) divided by the initial
value. Thus, a percent change in quantity demanded is just the absolute change in quantity
demanded divided by quantity demanded. Similarly, a percent change in price is just the
absolute change in price divided by price.

Simple arithmetic then tells us that price elasticity of demand is equal to the absolute change
in quantity demanded divided by the absolute change in price, all times the ratio of price to
quantity.

The first term in that expression is just the reciprocal of the slope of the demand curve, so the
price elasticity of demand is equal to the reciprocal of the slope of the demand curve times
the ratio of price to quantity. Technically, if price elasticity of demand is represented by an
absolute value, then it is equal to the absolute value of the quantity defined here.

This comparison highlights the fact that it's important to specify the range of prices over
which elasticity is calculated. Elasticity is not constant even when the slope of the demand
curve is constant and represented by straight lines. It is possible, however, for a demand
curve to have constant price elasticity of demand, but these types of demand curves will not
be straight lines and will thus not have constant slopes.

Price Elasticity of Supply and the Slope of the Supply Curve

Using similar logic, the price elasticity of supply is equal to the reciprocal of the slope of the
supply curve times the ratio of price to quantity supplied. In this case, however, there is no
complication regarding arithmetic sign, since both the slope of the supply curve and the price
elasticity of supply are greater than or equal to zero.

Other elasticities, such as the income elasticity of demand, don't have straightforward
relationships with the slopes of the supply and demand curves. If one were to graph the
relationship between price and income (with price on the vertical axis and income on the
horizontal axis), however, an analogous relationship would exist between the income
elasticity of demand and the slope of that graph

Relationship between total marginal and average function

(cost, revenue, utility and product function graphs)