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 is an economic tool which is used to measure degree of responsiveness of change in quantity supplied for 1 percentage change in the price of the product. price elasticity of demand measures the similar response but now of change in quantity demanded for 1 percentage change in the price of the product. price elasticity of supply determine if the supply is elastic or inelastic and price elasticity of demand does the same work for demand. While the price elasticity of supply is generally positive for the fact that supply function is upward sloping, price elasticity of demand is a negative value indicating that the demand function is inverse function of price

Income elasticity of demand measures the responsiveness of change in consumption or quantity demanded for a 1 percentage change in the income of the consumer. When there is an increase in the income of consumer, it is observed that there is an increase in the consumption of certain goods and services while there is a decline in the demand for some other goods. Former are the normal goods for which the income elasticity of demand is positive so that when the income is increased their consumption also increases. Latter are the inferior goods for which the income elasticity of demand is negative. When the income is increased their consumption actually decreases.