Income & Cross Elasticity of Demand

• Income Elasticity of Demand: responsiveness of demand to a change in consumer income.
• Cross Elasticity of Demand: responsiveness of the demand for one good (a) to a change in the price of a related good (b)
• Eab = %change in Qa / % change in Pb
• Complement goods: An increase in the price of good a, decrease the demand for good y
• Complement goods: Eab values: Negative
• Substitute goods: An increase in the price of good a, increase the demand for good y
• Substitute goods: Eab value: Positive
• Normal good: Income elastic.
• Normal good: Ey value: positive
• Normal good: An increase in income, increase demand
• Normal good: Relatively income elastic: Ey > 1: E.g. Luxuries.
• Normal good: Relatively income inelastic: 0 < Ey < 1. E.g. Necessities.
• Inferior good: Ey value: negative
• Inferior good: An increase in income, decrease demand