Question

Compare and contrast the price elasticity of supply and price elasticity of demand, and define income elasticity and how it distinguishes normal and inferior goods.

Answer 1

• Price elasticity of demand measures the responsiveness of a goods quantity demanded based on the changes in its price while the price elasticity of supply measures the responsiveness of a goods quantity supplied based on the changes in its price.
• The price elasticity of demand can be defined as the change in the quantity demanded of a good based on the change's in its price and the price elasticity of supply can be defined as the change in the quantity supplied of a good based on the changes in its price.
• A good having price elasticity of demand :-

1. Greater than 1 - perfectly elastic.
2. Less than 1 - inelastic.
3. Equal to 1 - unitary elastic.

• A good having price elasticity of supply :-

1. Greater than 1 - perfectly elastic.
2. Less than 1 - inelastic.
3. Equal to 1 - unitary elastic.

• When the the price of a good decreases, the people demand more of it and vice versa, then that good is called an elastic good.
• When the price of a good decreases or Increases, the demand for that good remains the same, then such a good is known as an inelastic good.
• When the price of a good increases, the quantity supplied of that good also increases, then such a good is said to have a perfectly elastic supply.
• Similarly when the increase and decrease in the price of a good does not affect the quantity supplied, then such a good is said to have an inelastic supply.
• Income elasticity of demand refers to the change in quantity demanded of a good based on the changes in customer's income.
• Normal goods are said to have positive income elasticity of demand because when the income of customers increase, their demand for normal goods also increases. For example :- clothing - it's demand increases when people have more income and decreases when they have less income.
• Inferior goods have negative income elasticity of demand because when the income of customers increases, their demand for those goods decreases and vice Versa. For example :- bus transportation - its demand decreases when people have more income in their hands.