Income elasticity of demand and Cross elasticity of demand

Income elasticity of demand

The responsiveness of demand to a change in income (%change QD/%change income)

Positive YED

normal goods

Negative YED

inferior good

normal good

Goods or services that increase in demand when people’s incomes rise

Inferior goods

demand decreases as incomes increase

cross elasticity of demand

the responsiveness of demand to a change in price of a related good (%changeQDA/%changepriceB)

XED positive

for a substitute good

XED negative

for complementary goods

positive XED between 0 and 1

weak substitutes

uses of YED

effect on recession/growth on demand

business planning on garden range

helps firms anticipate future demand

uses of XED

marketing strategies

If a competitor changes price you can work out the effect on their demand