Cross Elasticity and Income Elasticity

A. Cross Elasticity of Demand
The cross elasticity of demand is a measure of the extent to which the demand for a good changes when the price of a substitute or complement changes, other things remaining the same.
1. The formula used to calculate the cross elasticity of demand is:

Cross elasticity of demand = Percentage change in quantity demanded of a good
                                 Percentage change in price of one of its substitute s or complement s

2. The cross elasticity of demand for a substitute is positive.
3. The cross elasticity of demand for a complement is negative.

B. Income Elasticity of Demand
The income elasticity of demand is a measure of the extent to which the demand for a good changes when income changes, other things remaining the same.
1. The formula used to calculate the income elasticity of demand is:

Income elasticity of demand = Percentage change in quantity demanded
                                                   Percentage change in income


2. For a normal good, the income elasticity of demand is positive.
3. When the income elasticity of demand is greater than 1, demand is income elastic.
4. When the income elasticity of demand is between zero and 1, demand is income inelastic.
5. For an inferior good, the income elasticity of demand is less than 0.