supply have a direct relationship which states that an increase in the price will result in increased supply. The law of supply states that the supply will be affected only by the price, and the other elements are kept constant and the increase in price will increase the demand (Arnold, 2008). Therefore, it can be stated that an increase in price at £40 will result in an increase in demand, and this can be evaluated from the graph above which shows that when the price becomes £40, the supply becomes 70m units per year.

Income Effect

Normal goods are the goods, whose demand shows a direct relationship with the income as such goods are the goods that the customers demand when the income increases, and the affordability also increases. The goods whose demand falls when the income of the individual decreases, and the demand increases when the income is increased are known as normal goods (Gans, King and Mankiw, 2011). Therefore, assuming SmartWatch as a normal good, then the demand for such will increase, when the income of the individual increases. This effect is also known as income effect which states that when a person is earning more, then his affordability and capability is also increased, which provides him more opportunities to purchase quality products. Therefore, the demand for SmartWatch will increase when the income will increase, while the other elements or factors remain constant.

Question 2

Price Elasticity of Demand

The price elasticity of demand shows the relationship between the changes in the quantity relative to the price of a commodity. This is calculated by dividing the percentage in quantity demanded with the percentage change in price (Goodwin et al., 2018).