Income elasticity of demand measures the responsiveness of quantity demanded to a change in consumer income.
Types of Goods
| Income Elasticity | Type of Good | Effect of Income Increase |
|---|---|---|
| Ei > 1 | Normal luxury | Quantity demanded increases by a larger percentage |
| 0 < Ei < 1 | Normal necessity | Quantity demanded increases by a smaller percentage |
| Ei < 0 | Inferior good | Quantity demanded decreases |
Normal Goods
Income elasticity is positive.
Normal goods can be divided into:
Necessities: 0 < Ei < 1
Luxuries: Ei > 1
Inferior Goods
Income elasticity is negative.
When consumer income increases, quantity demanded decreases.
Cross Elasticity of Demand
Cross elasticity of demand measures the responsiveness of quantity demanded of one good to a change in the price of another good.
Types of Related Goods
| Cross Elasticity | Relationship |
|---|---|
| Exy > 0 | Substitute goods |
| Exy < 0 | Complementary goods |
| Exy approximately 0 | Independent goods |
Substitute Goods
Substitute goods can be used instead of each other.
Cross elasticity is positive.
Example: Coca-Cola and Pepsi.
If the price of Coca-Cola increases, demand for Pepsi may increase.
Complementary Goods
Complementary goods are normally consumed together.
Cross elasticity is negative.
Example: Mobile phones and mobile phone services.
If the price of mobile phones decreases, demand for mobile phone services may increase.
Independent Goods
Independent goods have little or no relationship in consumption.
Their cross elasticity is approximately zero.
Price Elasticity of Supply
Price elasticity of supply measures the responsiveness of quantity supplied to a change in price.
Categories of Price Elasticity of Supply
| Type | Elasticity | Meaning |
|---|---|---|
| Elastic Supply | Es > 1 | Quantity supplied changes by a larger percentage than price |
| Inelastic Supply | Es < 1 | Quantity supplied changes by a smaller percentage than price |
| Unit Elastic Supply | Es = 1 | Quantity supplied changes by the same percentage as price |
