Income Elasticity of Demand
Income elasticity of demand measures the level of responsiveness consumers have to income changes. It is derived us-
ing this formula:
Income elasticityof demand Percentage change in income
Percentage change in quantity demanded for a good
=Goods whose income elasticity of demand is greater than zero are normal goods. Goods that have an income elasticity
of less than zero (negative number) are inferior goods. In other words:
■ Normal goods:As income increases, quantity demanded of this good also increases.
■ Inferior goods:As income increases, quantity demanded of this good decreases.Normal and inferior goods can be examined to see the effects of increases in income. When individuals increase con-
sumption as a result of an increase in income, normal goods are often consumed. An example of a normal good would
be a luxury car, a house, or even a gourmet meal. When individuals decrease their consumption of certain goods because
of an income increase, they are decreasing quantity demanded for inferior goods. An example of an inferior good would
be canned soup or generic brand sneakers.
The income elasticity of demand provides useful information to a firm. If the firm knows the income elasticity of its
product to be low, the firm may want to upgrade or improve its product to improve the level of income it commands.
Price Elasticity of Supply
Let’s not forget that elasticity is a measure of responsivenessto price changes. The response of buyers to price changes is
measured by the price elasticity of demand. The measure of responsiveness suppliers have to price changes is called the
price elasticity of supply. Remember that the law of supply states that as prices rise, producers can increase their quantity
supplied. The price elasticity of supply is usually a positive number because of the positive relationship between price and
quantity supplied. Supply is elastic over a price range if the price elasticity of supply is greater than one percent over that
price range. It is inelastic over a price range if the price elasticity of supply is less than one percent over that price range.
Price elasticityof supply Percentage change in price
Percentage change in quantity supplied
=There are certain goods for which the price elasticity of supply is zero; land surfaces, the ocean, new Elvis Presley
songs. These are all goods that cannot be increased in supply no matter what the price. There are some goods for which
the quantity supplied at the current price can be whatever anyone wants given sufficient time. Food is an example that,
with advancements in technology, farmers have been able to make more of due to increases in prices.
Price elasticity can be illustrated in both the short run and the long run. Following are some examples that demonstrate
the impact of price elasticity in different time frames:
■ The short run:In the short run, everything is fixed; therefore, producers have a limited time to increase produc-
tion. Even so, firms can still increase production by increasing labor force, land use, and efficiency. However,
relative to the long run, supply has a less elastic effect.
■ The long run:In the long run, firms have enough time to change quantities of all their resources and for new
firms to begin producing the same product. Typically, the greater the time period allowed, the more likely firms
will increase quantity supplied in response to a price change. Supply curves applicable to shorter periods of time
tend to be more inelastic than curves that apply to longer periods of time. If firms have to change more of their
production techniques to meet supply needs, they have a longer response time. Essentially, firms need time to
switch resources such as raw material amounts, location of production, and the amount of labor. A restaurant can
switch from making burritos to tacos in a relatively short period of time because of the similarities in resources.
So, we can safely say that the restaurant has a large elasticity of supply. If the restaurant has to switch from burri-
tos to donuts, it will take a longer period of time because of a lack of similarity in product.Part III: Microeconomics