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 supply can be simply described as the percentage change of quantity supplied to the percentage change in price

It follows laws of supply which says that if other things are held constant then the price is directly related to the quantity supplied

It is from the producer point of view and it depends on the money determinants like competition in the market, taste and preference, etc

Price elasticity of demand, in the same way, can be defined as a percentage change in quantity demanded to the percentage change in price

It follows laws of demand which state that if other things held constant then the price is inversely related to the quantity demanded

It is basically from the consumer point of view and depends on many factors like test and preference presence of substitutes, the income of the consumer, etc

• Income elasticity of demand refers to the sensitivity in the change of quantity demanded with respect to change in income
• In formula it can be expressed as a percentage change in quantity demanded to the percentage change in income
• For normal goods, if there is an increase in income then the consumption of a normal good will also increase and in the case of inferior goods if the income increases then and the consumption of inferior goods will decrease
• This is also a violation of the law of demand