1.3 Income Elasticity and Cross Price Elasticity of Demand

Income elasticity of demand

measures the response of Qd to a change in consumer income

Income elasticity of demand formula

Midpoint Formula for Income Elasticity of Demand

Normal Goods

• Positive Income Elasticity

  • Income inelastic

    • Elasticity between 0 and 1 (Necessities)

Inferior Good

• Negative Income Elasticity

Income Elastic

• Elasticity >1 (Luxuries)

• Elasticity =1 (Semi-Luxury)

Five Types of Income Elasticity of Demand

• High Demand

• Unitary Demand

• Low Demand

• Zero Demand

• Negative Demand

High Demand

as income rises, these products and services see a significant increase in demand (luxury goods)

Unitary Demand

these products and services see a proportional increase to the increase of incomes (electronics, restaurants)

Low Demand

these products see a low rise in demand compared to incomes (ultra-luxury items and brand name essentials)

Zero Demand

these products see no increase in demand (essentials)

Negative Demand

these products and services are referred to as inferior goods because demand declines as incomes rise (cheap substitute goods, low-quality goods)

Income Elasticity Figure

Cross Price Elasticity of Demand

measures the response of demand for one good to changes in the price of another good

Cross-price elasticity of demand formula

Substitutes

Cross-price elasticity >0

Complements

Cross-price elasticity <0

Independent Goods/ No Relationship

Cross-price elasticity = 0

Cross Price Elasticity of Demand measures?

the responsiveness of demand for good X following a change of Price in related good Y

Cross Price Elasticity Elaborate Formula