income and cross elasticities

• The demand for a good will change if there is a change in consumers’ incomes 
• Income elasticity of demand = percentage change in quantity demanded / percentage change in income
• Income is elastic if it lies between +1 and -1.
• If income elasticity of demand is greater than +1 or less than -1, then it is elastic
• A normal good will always have a positive income elasticity because quantity demanded and income either both increase or both decrease
• An inferior good, will always have a negative elasticity because the signs on top and bottom of the formula will always be opposite 
• Cross elasticity of demand = percentage change in quantity demanded for good X / percentage change in price of good Y 
• The substitution effect outweighs the income effect because overall it is still true for an inferior good that a rise in price leads to an overall fall in quantity demanded
• Complements have a negative cross elasticity of demand with each other 
• Substitutes have a positive cross elasticity of demand with each other
• Complement - a good that is purchased with other goods to satisfy a want.
• Cross elasticity - a measure of the responsiveness of quantity demanded of one good to a change in price of another good
• Giffen good - a special type of inferior good, where demand increases when prices increases 
• Income effect - the impact on quantity demanded of a change in price due to a change in consumers’ real income that results from this change in price
• Income elasticity of demand - a measure of the responsiveness of quantity demanded to a change in income
• Inferior good - a good where demand falls when income increases
• Normal good - a good where demand increases when income increases 
• Substitute - a good which can be replaced by another to satisfy a want 
• Substitution effect - the impact on quantity demanded due to a change in price, assuming that consumers’ real incomes stay the same