Explain the relationship between price elasticity of
Explanation of Solution
Budget share or fraction of income of a consumer is one of the important determinants of price elasticity of demand. For example, poor people spend their major portion of income for consumption purposes especially in food items. Therefore, a small change in the price of these items makes more proportional change in its demand, while the rich spends a smaller portion of their income for consumption purposes. As a result, they would not search for a substitute as the price of a food item changes. In this way, the price elasticity of demand and fraction of income spent on the commodity are related.
Price elasticity of demand: Price elasticity of demand refers to the degree of responsiveness of quantity demanded due to a change in its price.
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Principles Of Microeconomics
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