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 refers to the change in the quantity demanded of a good with respect to changes in its price while the price elasticity of supply refers to the change in quantity supplied with respect to changes in its price.
• When the price elasticity of demand and supply is greater than 1, then the demand and supply are said to be elastic.
• When the price elasticity of demand and supply is less than 1, the demand and supply are said to be inelastic.
• When the price elasticity of supply and demand is equal to zero, then the supply and demand are said to be perfectly inelastic.

Income elasticity of demand refers to responsiveness of a goods demand with respect to the changes in a customers income.

• A normal good is said to have a positive income elasticity of demand as its demand increases with Increase in income and decreases with decrease in income. For example, certain clothes, meat etc.
• An inferior good is said to have a negative income elasticity of demand as its demand decreases when income increases and demand increases when income decreases. For example, bus transportation, their demand decreases when peoples income increases as they prefer using expensive cars.