Price elasticity of demand is a measure of how responsive the quantity demanded of a good is to a change in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price. If the quantity demanded of a good is very responsive to changes in its price, then it has a high price elasticity of demand. On the other hand, if the quantity demanded of a good is not very responsive to changes in its price, then it has a low price elasticity of demand.
Income elasticity of demand is a measure of how responsive the quantity demanded of a good is to a change in the income of the consumers. It is calculated as the percentage change in quantity demanded divided by the percentage change in income. If the quantity demanded of a good is very responsive to changes in the income of the consumers, then it has a high income elasticity of demand. On the other hand, if the quantity demanded of a good is not very responsive to changes in the income of the consumers, then it has a low income elasticity of demand.
There are several factors that can affect the price and income elasticity of demand for a good. For example, the availability of substitutes can affect the price elasticity of demand. If there are many substitutes available for a good, then the demand for that good will be more price elastic, as consumers can easily switch to a substitute if the price of the good increases. On the other hand, if there are few substitutes available for a good, then the demand for that good will be less price elastic, as consumers may not have many options if the price of the good increases.
The necessity of a good can also affect the price and income elasticity of demand. Necessities, such as food and clothing, tend to have a lower price elasticity of demand, as consumers will still need to purchase these goods even if their prices increase. On the other hand, luxury goods, such as expensive cars and jewelry, tend to have a higher price elasticity of demand, as consumers may be more willing to forgo these purchases if their prices increase.
The time frame in which the change in price or income occurs can also affect the price and income elasticity of demand. If a change in price or income occurs over a long period of time, then the demand for a good may be more elastic, as consumers have more time to adjust their purchasing habits. On the other hand, if a change in price or income occurs over a short period of time, then the demand for a good may be less elastic, as consumers may not have enough time to adjust their purchasing habits.
In summary, price and income elasticity of demand are important economic concepts that measure how responsive the quantity demanded of a good is to changes in its price or the income of the consumers. There are several factors that can affect the price and income elasticity of demand for a good, including the availability of substitutes, the necessity of the good, and the time frame in which the change in price or income occurs. Understanding these concepts can help businesses and policymakers make informed decisions about pricing and economic policy.