Income and cross elasticities of demand

• What is income elasticity of demand and what is its formula?

  • Income elasticity of demand (YED) reveals how responsive the change in quantity demanded is to a change in income

  YED=%change in QD/%change in income
• What is the YED of a normal good?

  Value : YED>0

  Normal necessity

  • Demand increases when income increases
  • Income inelastic, which means that it is relatively unresponsive to a change in income 
• What is the YED of a luxury good?

  YED > 1

  Normal luxury

  • Demand increases when income increases
  • Income elastic, which means that it is relatively responsive to a change in income 
• What is the YED of a inferior good?

  YED < 0

  Inferior Good

  • Demand decreases when income increases
• What is cross elasticity of demand and what is its formula?

  Cross price elasticity of demand (XED) reveals how responsive the change in quantity demanded for good A is to a change in price of good B

  Formula : % change in QD of Good A/ % change in Price of Good B
• What is the XED of complementary goods?

  XED < 0

  Complementary goods

  • The negative value indicates the two goods are complements
  • The higher the value the stronger the relationship
• What is the XED of subsitutes?

  XED > 0

  Substitutes

  • The positive value indicates the two goods are substitutes
  • The higher the value, the stronger the relationship
• What is the XED of unrelated goods?

  XED = 0

  Unrelated goods

  • A value of zero indicates that there is no relationship between the two goods.
  • The closer to zero, the weaker the relationship is