Cross & income elasticity of demand  Elasticity
Cross & income elasticity of demand
Lessons
Notes:
Cross Elasticity of Demand
To measure the responsiveness of substitutes and complements of goods, we use the cross elasticity of demand.
The cross elasticity of demand measures the change of demand from one good to a change in price of a substitute or complement. In other words,
The formula for cross elasticity of demand is
If the cross elasticity of demand is positive, then the it is a substitute. This means when the price of the substitute increases, then the demand for the good increases.
If the cross elasticity of demand is negative, then the it is a complement. This means when the price of the complement increases, then the demand for the good decreases.
Income Elasticity of Demand
The income elasticity of demand is the responsiveness of the demand for a good to a change in income. In other words,
The formula for income elasticity of demand is
If the income elasticity of demand is greater than 1, then the good is normal and income elastic. In addition, the percentage of income spent on the good increases as income increases.
If the income elasticity of demand is less than 1 and positive, then the good is normal and income inelastic. In addition, the percentage of income spent on the good decreases as income increases.
If the income elasticity of demand is negative, then the good is inferior. This means when income increases, the demand for the good decreases.

Intro Lesson
Cross & Income Elasticity of Demand Overview: