Difference between Price Elasticity and Income Elasticity

Difference between Price Elasticity and Income Elasticity

The major difference in both terms is that Price elasticity of demand describes the change in demand due to change in the price of commodity whereas the income elasticity of demand explains how much demand of commodity changes with change in income.

To know the difference between these two, we must clear the meaning of these terms:

Meaning of Price Elasticity of Demand:-

It refers to the degree of responsiveness of quantity demanded with respect to change in the price of that particular commodity, other things remain constant.

 It can be calculated as the percentage change in quantity demanded divided by the percentage change in price.

Formula of Price elasticity of Demand - Difference between Price Elasticity and Income Elasticity

% Δ quantity demanded = percentage change in quantity demanded

% Δ Price  = percentage change in price

For example, the price of a commodity falls from Rs 20 per unit to Rs 15 per unit and due to this, the quantity demanded of that commodity increases from 100 units to 150 units.

Then, The price elasticity can be calculated as:

The Percentage change in demand = (change in demand/ original demand) *100

                      = (50/100) *100 =50%

Percentage change in price = (change in price/original price) *100

                        = (5/20) *100 =25%

Price elasticity of demand = 50/25 = 2

It means the quantity demanded increased by 2 time due to falling in price by Rs 5.

Meaning of Income Elasticity of Demand:-

It refers to the ratio of the percentage of change in quantity demanded and percentage change in income level of consumer. Therefore, It measures the degree of sensitivity of quantity demanded to change in income.

Hence, It can be calculated as the percentage change in quantity demanded divided by the percentage change in income of the consumer.

Formula of Income elasticity of Demand - Difference between Price Elasticity and Income Elasticity
Here,  % Δ quantity demanded = percentage change in quantity demanded
% Δ Income of Consumer = percentage change in Income of Consumer

Thus, it indicates that Higher the income elasticity, more sensitive will be the demand with respect to income. Also, It can be positive or negative depends upon the type of goods demanded whether normal or inferior.

Chart of Difference between Price Elasticity and Income Elasticity:

Basis of Difference

Price Elasticity

Income Elasticity

Meaning It is the ratio of the percentage change in quantity demanded to the percentage change in the price of a commodity. It is the ratio of the percentage change in quantity demanded to the percentage change in income of the consumer.

Denoted by

Price elasticity of demand is denoted by EP or PED. Income Elasticity of demand is denoted by EY or YED.
Coefficient  The coefficient of Price elasticity is always negative.  The coefficient of Income elasticity is positive for normal goods and negative for inferior goods.

Degree of Elasticity

The degree of price elasticity varies in betweento +∞ The degree of elasticity varies in between +∞ to -∞ depending upon the nature of goods.
Elasticity coefficient represents The coefficient of price elasticity represents different degrees of price elasticities such as perfectly elastic, inelastic and unitary elastic etc. The coefficient of income elasticity represents types of income elasticities to identify the nature of goods whether they are normal goods or inferior goods.

Associated Curve

Price Consumption curve is used to represent different amounts of quantity demanded at different prices. Income Consumption Curve is used to represent different amounts of quantity demanded at different levels of income.

Calculation

PED = %Δ in quantity demanded/ %Δ in price YED = %Δ in quantity demanded/ %Δ in income

Download the chart:-

If you want to download the chart please download the following image and PDF file:-

Difference between Price Elasticity and Income Elasticity 1 min 1 298x300 - Difference between Price Elasticity and Income Elasticity
Difference between Price Elasticity and Income Elasticity
application pdf 150x150 - Difference between Price Elasticity and Income Elasticity
Difference between Price Elasticity and Income Elasticity

Conclusion:

Thus, the elasticity of demand indicates the proportionate change in the quantity demanded of a commodity due to change in any of its quantitative determinants. Price elasticity and income elasticity of demand measure the impact of change in price and income on the quantity demanded.

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