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Price elasticity of demand and income elasticity of demand are two important concepts in microeconomics used to measure the responsiveness of quantity demanded to changes in different economic variables. While both are elasticities, they relate to different factors and provide different insights about consumer behavior and the nature of goods. Price Elasticity of Demand (PED) Price elasticity of demand refers to the degree of responsiveness of the quantity demanded of a good to a change in its own price. It is calculated using the following formula: PED = (% Change in Quantity Demanded) / (% Change in Price) If the absolute value of PED is greater than 1, the demand is said to be elastic, meaning consumers respond significantly to price changes. If it is less than 1, demand is inelastic, implying that changes in price lead to relatively smaller changes in quantity demanded. When PED equals 1, demand is said to be unitary elastic. There are several factors influencing price elasticity of demand: 1. Availability of Substitutes: If there are close substitutes available, the demand is likely to be more elastic. 2. Nature of the Good: Necessities tend to have inelastic demand, while luxuries usually have elastic demand. 3. Proportion of Income Spent: Goods that consume a larger share of a consumer’s income tend to have more elastic demand. 4. Time Period: In the long run, demand becomes more elastic as consumers find alternatives or adjust their behavior. 5. Addictive Nature of Good: Goods that are addictive (like tobacco) tend to have inelastic demand. Income Elasticity of Demand (YED) Income elasticity of demand measures the responsiveness of the quantity demanded of a good to a change in consumers' income. It is calculated using __________ ____ _________ _______ ________ _______ ________ ______ _______.
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