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 shows the relationship between price and quantity demanded

It shows the inverse relationship between price and quantity demanded.

It is given by percentage method

It is given by the ratio of percentage change of quantity demanded to the percentage change in the price

If we talk about the price elasticity of supply then it is from the producer side

It is a direct relationship on the supply curve between price and quantity supplied

if we talk about price elasticity of demand or price elasticity of supply then both of them have basically three types -

Elastic demand/ supply

Inelastic demand/supply

Unit elastic supply/demand

Income elasticity of demand shows the relationship between income and the quantity demanded

It is the ratio of percentage in of quantity demanded to the percentage change in the income of the consumer

As the income of consumer rises then consumer become more focused towards normal goods

If income elasticity of demand is positive then the good can be said as normal and if it is negative then the good can be said as inferior goods

Inferior goods are those good in which quantity demand decreases as the income level Rises

Normal goods can be of two types that are han luxury goods and necessity goods