Difference between Price Elasticity and Income Elasticity of Demand

 

Learning Contents:                                                            

·         Difference between Price Elasticity and Income Elasticity of Demand

 

Basis of Difference

 

 

Price Elasticity of Demand

 

Income Elasticity of Demand

 

Meaning

It is the ratio of the percentage change in quantity demanded to the percentage change in the price of the commodity.

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

Sensitivity

It measures the demand’s sensitivity to change in price.

It measures the demand’s sensitivity to change in income.

Nature of Relationship

The relationship between quantity demanded and the price is always negative or inverse. In other words, the Price elasticity of demand is always negative.

The relationship between quantity demanded and income is based upon the type of goods: Positive relationship for normal goods and negative relationship for inferior goods. In other words, the Income elasticity of demand can either be positive or negative.

Degrees of Elasticity

The degree of price elasticity varies from 0 to ∞

The degree of income elasticity varies from +∞ to -∞ depending upon the nature of goods.

Coefficient

The price elasticity of demand coefficient is denoted by EP or PED.

The income elasticity of demand coefficient is denoted by EY or YED.

Formula

PED = % Change in Quantity Demanded / % Change in Price

YED = % Change in Quantity Demanded / % Change in Income

Curve

The price demand curve is always downward sloping leaving exceptional cases.

The income demand curve is upward sloping for normal goods and downward sloping for inferior goods.


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