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Price elasticity |
Income elasticity |
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1. (Equation) Price elasticity
of demand = (percentage change in quantity demanded) / (percentage change in price). |
1. (Equation) Income elasticity of demand =
(percentage change in quantity demanded) / (percentage change in income). |
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2. Quantity
demanded is always
negatively related to the price,
which makes the price elasticity
of demand a negative number
mathematically. |
2. For normal goods, the quantity demanded increases when income increases. Therefore,
the income elasticity is positive. |
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3. In economics,
we often ignore the negative sign and represent the elasticity as a
positive
number. |
3. For inferior
goods, the quantity demanded
decreases when income increases. Therefore, the income elasticity is negative. |
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4. When price is high and quantity demanded is low, the demand
is elastic. If price increases,
total revenue decreases. |
4. Among normal goods, for necessities,
income elasticity is small because they are necessary to our lives and people still need them
even though the income is low. |
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5. Elasticity changes at different prices along the linear demand
curve. |
5. For luxuries, income elasticity is large because people
can choose not to buy them if their income is low |
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6. When price is low and quantity demanded is high,
the demand is inelastic.
If price increases,
total revenue
increases. |
6. Income
elasticity of demand measures the responsiveness of quantity demanded to the
change of income. |