Question 3 (a)
Price elasticity versus income elasticity of demand
6 marks
- Time to write
- About 12 minutes
Question
Question 3 (a) · 6 marksDifferentiate between price elasticity of demand and income elasticity of demand. Explain with an example.
Reworded from the university paper; the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- Differentiate…Explain…Two asks in one question: answer both.
- Differentiate betweenSet the differences out in a table, basis by basis, not as two separate essays.
- exampleExamples are asked for: one short example with each point.
Write it in this order
- Read; underline the asks; jot your points 1 min
- 1 Price elasticity: meaning and formula 1½ marks 3 min
- 2 Income elasticity: meaning and formula 1½ marks 2 min
- 3 Differences set out 1½ marks 2 min
- 4 Examples 1 mark 2 min
- 5 Conclusion ½ mark 1 min
- Check: every ask answered, key terms underlined 1 min
Easy marks
- Steps 1 and 2 opens with the meaning: a one-line definition, the quickest mark in each.
Short on time? Trim steps 1–3 evenly rather than skip one: each is capped at its own marks. End with step 5 in a line or two.
Try it first. About 12 minutes for 6 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
Price elasticity of demand. It measures how strongly the quantity demanded of a good responds to a change in its own price, other things (income, tastes, other prices) held constant:
Price elasticity (Ep) = (% change in quantity demanded) ÷ (% change in own price).
Because quantity falls when price rises (the law of demand), its value is negative for a normal good, and the minus sign is usually ignored when its size is compared. Demand is elastic if the value (ignoring the sign) exceeds 1, inelastic if it is below 1 and unitary if it equals 1.
Income elasticity of demand. It measures how strongly the quantity demanded responds to a change in the consumer's income, the good's price and other prices held constant:
Income elasticity (Ey) = (% change in quantity demanded) ÷ (% change in income).
It is positive for a normal good (demand rises with income) and negative for an inferior good (demand falls with income).
| Basis | Price elasticity of demand | Income elasticity of demand |
|---|---|---|
| Cause of the change | the good's own price | the consumer's income |
| What is held constant | income, tastes and other prices | the good's price, other prices and tastes |
| Usual sign | negative (by the law of demand) | positive for normal goods, negative for inferior goods |
| What it tells us | elastic, inelastic or unitary demand; how spending on the good changes when its price changes | whether the good is normal or inferior, and how fast its demand grows as incomes rise |
| Graph | a movement along the demand curve | a shift of the demand curve |
- Price elasticity (our own figures): the price of a cinema ticket in Pune rises from Rs 200 to Rs 220 (10%) and tickets sold fall from 1,000 to 850 (15%). Price elasticity = -15/10 = -1.5: demand is elastic.
- Income elasticity (our own figures): a family's income rises by 20% and its purchases of packaged juice rise by 30%: income elasticity = 30/20 = 1.5, a normal good. When incomes rise, travellers on Indian Railways move from non-air-conditioned to air-conditioned coaches, so demand for the non-air-conditioned coach falls: it behaves as an inferior good, with negative income elasticity.
Conclusion. Both elasticities measure the responsiveness of quantity demanded, but to different causes: price elasticity to the good's own price (a move along the demand curve, normally negative), income elasticity to income (a shift of the curve, positive or negative according to whether the good is normal or inferior).
Where the 6 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Price elasticity: meaning and formula | 1.5 |
| 2 | Income elasticity: meaning and formula | 1.5 |
| 3 | Differences set out | 1.5 |
| 4 | Examples | 1 |
| 5 | Conclusion | 0.5 |
| Total | 6 |
Report a problemopens an email to admin@getkunji.com with the question ID6517-Q3aalready filled in.