Question

Please define and explain “income elasticity of demand” and “price elasticity”:

Answer 1

Income elasticity of demand measures the change in the demand of a good in response to change in the income of the consumer, keeping other factors constant.

If income elasticity of demand is positive, then good is normal good

If income elasticity of demand is negative, then good is inferior good.

Income elasticity of demand = (% change in quantity of good / % change in income of consumer)

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Price elasticity of demand measures the change in quantity demand of a good in response to change in price of that good, keeping other factors constant.

If absolute of price elasticity of demand is greater than 1, then the demand is elastic.

If absolute of price elasticity of demand is less than 1, then the demand is inelastic.

If absolute of price elasticity of demand is equal to 1, then the demand is unitary elastic.

Price elasticity of demand = (% change in quantity demand of good / % change in price of that good)