Question

How does the price elasticity of demand compare to the income elasticity of demand?

Answer 1

Price elasticity of demand is defined as percentage change in quantity demanded as price changes by 1 percent. It is negative for normal goods, because as the price increases, quantity demanded falls. For giffen goods it is positive, which means that as prices increase, quantity demanded of giffen goods increases.

Income elasticity of demand is defined as the percent change in quantity demanded due to a 1 percent change in income. This is usually positive because as the income increases, the quantity of goods demanded increases. For inferior goods, the income elasticity is negative.

Note that all giffen goods are inferior goods but not all inferior goods are giffen goods.