Income Elasticity of Demand and Cross Price Elasticity of Demand

A set of flashcards covering key concepts related to Income Elasticity of Demand and Cross Price Elasticity of Demand, derived from the lecture notes.

Income Elasticity of Demand

Measures how much the quantity demanded of a good responds to a change in consumers’ income.

Formula for Income Elasticity of Demand (Ed, I)

Percentage change in quantity demanded divided by the percentage change in income.

Normal Goods

Goods that have a positive income elasticity, meaning demand increases as income increases.

Inferior Goods

Goods that have a negative income elasticity, meaning demand decreases as income increases.

Cross-Price Elasticity of Demand

Measures how much the quantity demanded of one good responds to a change in the price of another good.

Substitutes

Goods typically used in place of one another, which have a positive cross-price elasticity.

Complements

Goods that are typically used together, which have a negative cross-price elasticity.

Practice Question: Carolyn's Income Elasticity

Current income elasticity based on the change in quantity demanded of earrings compared to income change.

Positive Cross-Price Elasticity

The characteristic of substitute goods, indicating that demand for one good increases as the price of the other rises.

Negative Cross-Price Elasticity

The characteristic of complementary goods, indicating that demand for one good decreases as the price of the other rises.