Price Elasticity of Demand vs Income Elasticity of Demand
Price Elasticity of Demand and Income Elasticity of Demand are two Elasticity concepts in AP Economics that students often mix up. In short: price elasticity of demand is price elasticity of demand measures how responsive quantity demanded is to a change in the good's price. Meanwhile, income elasticity of demand is income elasticity of demand measures how responsive the quantity demanded is to a change in consumers' income. Here is how they compare side by side.
Price elasticity of demand measures how responsive quantity demanded is to a change in the good's price.
It is the percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the absolute value is greater than 1 and inelastic when it is less than 1. Goods with many substitutes, that take a large share of income, or judged over a longer time horizon tend to be more elastic.
Income elasticity of demand measures how responsive the quantity demanded is to a change in consumers' income.
It is calculated as the percentage change in quantity demanded divided by the percentage change in income. Demand is considered a normal good if the ratio is positive, meaning demand increases as income increases. Demand is considered an inferior good if the ratio is negative.
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