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# Income and Price Elasticity of Demand

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Introduction

A guide for income elasticity of demand Income elasticity of demand measures the relationship between a change in quantity demanded and a change in income The formula IED = % Change in Quantity Demanded % Change in Income Levels The numbers If IED is LESS than 1 it is income INELASTIC. If IED is GREATER than 1 it is income ELASTIC. Higher the IED the more responsive demand is to a change in income. Lower the IED the less responsive demand is to a change in income. Plus or Minus Significance NEGATIVE - = INFERIOR GOOD POSITIVE + = NORMAL GOOD Inferior Good Inferior goods are when demand for a product falls, income levels rise. ...read more.

Middle

This way they can work out a pricing strategy and maximize sales and revenue. Cross price elasticity of demand Cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the demand for a good to a change in the price of another good. It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good. XED = % Change in Quantity Demanded for Good A % Change in Price of Good B Numbers If XED is LESS than 1 it is INELASTIC. If XED is GREATER than 1 it is ELASTIC. ...read more.

Conclusion

Price elasticity of supply Price elasticity of supply (PES) is an elasticity defined as a numerical measure of the responsiveness of the supply of a given good to a change in the price of that good. Formula PES = % Change in Quantity Supplied % Change in Price Numbers If PES is LESS than 1, then supply is price INELASTIC. If PES is GREATER than 1, then supply is price ELASTIC. When PES is 0 then supply is PERFECTLY INELASTIC. When PES is infinity then supply is PERFECTLY ELASTIC. For example, if, in response to a 10% rise in the price of a good, the quantity supplied increases by 20%, the price elasticity of supply would be 20%/10% = 2. ...read more.

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## Here's what a star student thought of this essay

3 star(s)

### Response to the question

This essay gives a good overview of elasticities, including the numerical formulae and various definitions. Although there are diagrams, I would've liked to have seen a diagram including two demand (or supply) curves with varying elasticities, then showing how a ...

### Response to the question

This essay gives a good overview of elasticities, including the numerical formulae and various definitions. Although there are diagrams, I would've liked to have seen a diagram including two demand (or supply) curves with varying elasticities, then showing how a change in price causes a difference in the change of quantity. This would've shown higher level analysis, as it enables you to comment how your diagram explains why elasticity values are useful.

### Level of analysis

The analysis in this essay is sound. I liked how they used the buzzword of "responsiveness" when defining elasticities, as this is a concept the examiners are looking for. It was nice to see some numerical analysis of the values of income elasticity of demand, showing the ranges of values which are defined as inelastic and elastic. This is often neglected in essays about elasticity, and is a good way to gain marks as it shows an understanding of the formula beyond the simple definition. I have a query with their definition of inferior goods - it is illogical to say "when demand for a product falls, income levels rise" as demand for the product has no affect on income. You must be clear when explaining concepts in economics, as getting something so simple the wrong way round makes no sense. I would simply say "when incomes rise, demand for the product falls". What is strong about this essay is the awareness of how the elasticity values are useful to firms, as this shows an understanding of their significance in economics. When talking about usefulness, I always mention that the values are estimates and the data is historical, so there is limited use in predicting the future responsiveness. It was nice to see a variety of diagrams displaying price elasticity of supply, but it would've been stronger if they had done the same for the other elasticities. It seems price elasticity of demand has been neglected here!

### Quality of writing

The essay has a clear structure, addressing each elasticity separately. If I was doing this essay, I would've had an overall conclusion talking about the general significance of elasticities to a firm. As mentioned earlier, I would've discussed that they are estimates and other limitations. Spelling, punctuation and grammar are fine, but their phrasing is poor in places. As mentioned above, getting something the wrong way round can make no sense economically, losing marks for poor understanding.

Reviewed by groat 29/02/2012

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