• measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good
• percentage change in quantity demanded brought about by the percentage change in income
If the computed income elasticity yields a negativecoefficient, we have computed for an inferior good, be it elastic, inelastic or unit elastic.
If the computed income elasticity yields a positive, elastic (> 1) coefficient, we have computed for a luxury or superior good.
If the computed income elasticity yields a positive, inelastic (< 1) coefficient, we have computed for a normal good.
CROSS ELASTICITY OF DEMAND
• measures how sensitive consumer purchases of one product (say, X) are to a change in the price of some other product (say, Y).
• percentage change in quantity demanded of product X brought about by the percentage change in the price of product Y
If the computed cross elasticity of demand yields a positivecoefficient (variables move in the same direction), be it elastic, inelastic or unit elastic, we have computed for substitute goods.
If the computed cross elasticity of demand yields a negative coefficient (variables move in opposite directions), be it elastic, inelastic or unit elastic, we have computed for complementary goods.