1. Home
  2. >Microeconomics
  3. >Elasticity
Help

Cross & income elasticity of demand

Get the most by viewing this topic in your current grade. Pick your course now.

?
Intros
Lessons
  1. Cross & Income Elasticity of Demand Overview:
  2. Cross Elasticity of Demand
    • Formula for Cross Elasticity of Demand
    • Do not take the absolute value
    • Positive  →  goods are substitutes
    • Demand curve for good shifts rightward
    • Negative  →  goods are complements
    • Demand curve for good shifts leftward
  3. Cross Elasticity of Demand
    • Formula for Income Elasticity of Demand
    • Do not take the absolute value
    • Positive  →  goods are normal
    • Negative  →  goods are inferior
?
Examples
Lessons
  1. Calculating Cross Elasticity of Demand
    Suppose that a company decides to increase the price of juice by 20%. By doing this, they see a 15% increase in the quantity of coffee.
    1. Find the cross elasticity of demand for coffee in respect to apple juice
    2. State whether juice is a substitute or a complement.
    3. What happens to the demand curve for coffee?
  2. A company decides to increase their price of candy from $5 to $10. By doing so, the quantity of water decreases from 80 to 50, and decreases the quantity of candy from 100 to 50.
    1. Calculate the price elasticity of demand for candy using arc elasticity of demand. Is it elastic, inelastic, or unit elastic?
    2. Calculate the cross elasticity of demand for water in respect to candy. Are candies a substitute or a complement?
  3. Calculating Income Elasticity of Demand
    If Kevin's income increases from $100 to $150 a day, he increases his demand for ice cream by 10%, and decreases his demand for coffee by 20%. Calculate Kevin's income elasticity of demand for
    1. Ice cream
    2. Coffee
  4. If Patsy's income increases from $50 to $100 a week., she increases her demand for chocolate from 2 kg to 5 kg.
    1. Calculate the income elasticity demand for chocolate.
    2. Is chocolate a normal good or inferior good? Why?
    3. Is the income elastic or inelastic? Why?
Topic Notes
?

Introduction to Cross and Income Elasticity of Demand

Welcome to our exploration of cross elasticity and income elasticity of demand! These crucial economic concepts help us understand how consumer behavior changes in response to various factors. Cross elasticity of demand measures how the demand for one product is affected by price changes in another related product. On the other hand, income elasticity of demand shows how changes in consumer income impact the demand for a particular good or service. Our introduction video provides a clear, visual explanation of these concepts, making them easier to grasp. As your math tutor, I'm excited to guide you through these ideas, which are fundamental to understanding market dynamics and consumer choices. By mastering these elasticities, you'll gain valuable insights into how businesses make pricing decisions and how economic policies can affect consumer spending patterns. Let's dive in and unravel the fascinating world of demand elasticities together!

Cross Elasticity of Demand

Cross elasticity of demand is a crucial economic concept that measures how the demand for one product changes in response to a price change in another related product. This concept is essential for businesses and economists to understand the relationships between different goods in the market and make informed decisions about pricing strategies.

The formula for cross elasticity of demand is:

Cross Elasticity of Demand = (Percentage Change in Quantity Demanded of Good A) / (Percentage Change in Price of Good B)

To calculate cross elasticity of demand, you need to follow these steps:

  1. Determine the initial and final quantities of Good A and the initial and final prices of Good B.
  2. Calculate the percentage change in quantity demanded of Good A.
  3. Calculate the percentage change in price of Good B.
  4. Divide the percentage change in quantity demanded by the percentage change in price.

The resulting value can be positive, negative, or zero, each indicating a different relationship between the two goods:

  • Positive cross elasticity: This indicates that the goods are substitutes. As the price of one good increases, the demand for the other good increases.
  • Negative cross elasticity: This suggests that the goods are complements. As the price of one good increases, the demand for the other good decreases.
  • Zero cross elasticity: This means the goods are unrelated, and a change in the price of one does not affect the demand for the other.

Let's explore these concepts with some examples:

Substitutes (Positive Cross Elasticity): Consider coffee and tea. If the price of coffee increases, people might switch to tea as an alternative. This would result in an increase in the demand for tea, leading to a positive cross elasticity value. For instance, if a 10% increase in coffee prices leads to a 5% increase in tea demand, the cross elasticity would be 0.5 (5% / 10%).

Complements (Negative Cross Elasticity): Think about smartphones and mobile apps. If the price of smartphones increases significantly, fewer people might buy them, which would also decrease the demand for mobile apps. This negative relationship results in a negative cross elasticity value. For example, if a 15% increase in smartphone prices causes a 9% decrease in app downloads, the cross elasticity would be -0.6 (-9% / 15%).

The uses of cross-price elasticity of demand are numerous and valuable for businesses and policymakers:

  1. Pricing Strategies: Companies can use this information to set optimal prices for their products, considering how price changes might affect the demand for related goods.
  2. Product Development: Understanding which products are substitutes or complements can guide decisions about new product launches or improvements.
  3. Marketing Campaigns: Businesses can tailor their marketing efforts based on the relationships between products, potentially promoting complementary goods together.
  4. Competitive Analysis: Firms can assess how their pricing decisions might impact competitors' sales and vice versa.
  5. Economic Forecasting: Economists use cross elasticity data to predict market trends and consumer behavior.

It's important to note that cross elasticity values can vary depending on the specific market conditions, time frame, and consumer preferences. For example, in the short term, the cross elasticity between two goods might be low, but over time, as consumers adjust their habits, it could increase.

Additionally, the strength of the relationship between goods can be inferred from the magnitude of the cross elasticity value. A higher absolute value indicates a stronger relationship, whether it's a substitute or a complement. For instance, a cross elasticity of 2.0 between two substitutes suggests a stronger relationship than a value of 0.5.

In conclusion, understanding and calculating cross elasticity of demand is a powerful tool for analyzing market dynamics and making informed business decisions. By considering how changes in one product's price affect the demand for related products, businesses can optimize their strategies and economists can better predict

Income Elasticity of Demand

Income elasticity of demand is a crucial economic concept that measures the responsiveness of demand for a good or service to changes in consumer income. This metric helps businesses and policymakers understand how changes in income levels affect consumer behavior and market dynamics. To fully grasp this concept, it's essential to explore its formula, calculation method, interpretation, and real-world applications.

The income elasticity of demand formula is expressed as:

Income Elasticity of Demand = (Percentage Change in Quantity Demanded) / (Percentage Change in Income)

To calculate income elasticity of demand, follow these steps:

  1. Calculate the percentage change in quantity demanded
  2. Calculate the percentage change in income
  3. Divide the percentage change in quantity demanded by the percentage change in income

For example, if a 5% increase in income leads to a 10% increase in demand for a product, the income elasticity of demand would be 10% / 5% = 2.

The interpretation of income elasticity values is crucial for understanding consumer behavior:

  • Income elasticity greater than 1: This indicates income elastic goods, where demand increases more than proportionally to income changes. Luxury items like high-end electronics or vacation packages often fall into this category.
  • Income elasticity between 0 and 1: These are income inelastic goods, where demand increases less than proportionally to income changes. Necessities like basic food items or utilities typically exhibit this behavior.
  • Negative income elasticity: This represents inferior goods, where demand decreases as income increases. Budget brands or public transportation in some contexts might display this characteristic.

Normal goods have a positive income elasticity of demand, meaning their demand increases as income rises. They can be further categorized into income elastic and income inelastic goods based on whether their elasticity is greater than or less than 1, respectively.

Real-world examples help illustrate these concepts:

  • Income elastic goods: As incomes rise, consumers might significantly increase their spending on luxury cars, designer clothing, or gourmet restaurants.
  • Income inelastic goods: Essential items like bread, milk, or basic clothing see relatively small increases in demand as incomes grow.
  • Inferior goods: As incomes increase, consumers might reduce their consumption of instant noodles, opting for higher-quality alternatives.

Understanding income elasticity of demand is vital for businesses in pricing strategies, product development, and market targeting. For instance, a company producing luxury goods might focus on expanding in regions with rising incomes, while a budget retailer might target areas with slower income growth.

It's important to note that income elasticity can vary across different income levels and markets. A product that is income elastic in one country might be inelastic in another due to cultural differences or economic conditions. Additionally, income elasticity can change over time as consumer preferences evolve or new alternatives enter the market.

Policymakers also use income elasticity of demand to predict changes in tax revenues, assess the impact of economic policies on different sectors, and design welfare programs. For example, understanding the income elasticity of demand for healthcare can inform decisions about public health spending and insurance policies.

In conclusion, income elasticity of demand is a powerful tool for analyzing consumer behavior and market dynamics. By understanding how to calculate and interpret this metric, businesses can make informed decisions about product positioning, pricing, and market expansion. Policymakers can use this information to craft effective economic policies and social programs. As economies evolve and consumer preferences shift, the ability to accurately assess and apply income elasticity of demand will remain a valuable skill in economics and business strategy.

Comparing Cross and Income Elasticity

Cross elasticity and income elasticity of demand are two important economic concepts that help analyze consumer behavior and market dynamics. While both measure the responsiveness of demand to changes in economic variables, they focus on different aspects of consumer decision-making.

Cross elasticity of demand measures how the quantity demanded of one good changes in response to a change in the price of another good. The elasticity formula for cross elasticity is calculated as the percentage change in quantity demanded of good A divided by the percentage change in the price of good B. On the other hand, income elasticity of demand measures how the quantity demanded of a good changes in response to a change in consumer income. The formula for calculating income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income.

Both elasticities share similarities in their interpretation. A positive value indicates that the goods are complements or normal goods, while a negative value suggests substitutes or inferior goods. However, the economic significance of these concepts differs. Cross elasticity helps identify relationships between goods, such as substitutes or complements, which is crucial for pricing strategies and market competition analysis. Income elasticity, conversely, provides insights into how changes in income levels affect demand for different types of goods, which is valuable for understanding consumer behavior across various income groups.

In real-world economic analysis, cross elasticity is often used by businesses to assess the impact of price changes on related products. For example, a coffee shop might use cross elasticity to determine how a price increase in coffee affects the demand for pastries. Income elasticity, on the other hand, is frequently employed by policymakers and businesses to forecast demand changes as economic conditions fluctuate. For instance, luxury car manufacturers might use income elasticity to predict sales in different economic scenarios.

The calculation of these elasticities requires careful data collection and analysis. For cross elasticity, businesses need to track sales data of multiple products and their price changes over time. Income elasticity calculations often rely on broader economic data, including consumer income levels and purchasing patterns across different income groups. Both concepts are essential tools in economic decision-making, helping businesses optimize pricing strategies, product offerings, and marketing efforts, while also assisting policymakers in understanding the broader economic impacts of income changes on various sectors.

In conclusion, while cross elasticity and income elasticity of demand share some similarities in their calculation methods and interpretation, they serve distinct purposes in economic analysis. Cross elasticity focuses on the interrelationships between different goods, providing valuable insights for competitive strategy and product positioning. Income elasticity, meanwhile, offers a broader perspective on how economic growth or decline affects demand across different product categories. Together, these concepts form a comprehensive toolkit for understanding and predicting consumer behavior in complex market environments.

Practical Applications of Elasticity

Cross-price elasticity of demand and income elasticity of demand are powerful economic concepts with wide-ranging applications in business strategy and economic policy. These tools provide valuable insights into consumer behavior, market dynamics, and economic trends, making them indispensable for both companies and policymakers.

In the business world, cross-price elasticity of demand uses are numerous and significant. Companies leverage this concept to develop effective pricing strategies and conduct comprehensive market analyses. For instance, if the cross-price elasticity of demand for two goods is 1.25, then these products are considered substitutes. This information is crucial for businesses when deciding how to price their products relative to competitors or when introducing new product lines.

Retailers often use cross-price elasticity data to optimize their product mix and pricing. For example, a supermarket might analyze the cross-price elasticity between different brands of cereal to determine how price changes in one brand might affect sales of others. This knowledge allows them to make informed decisions about promotions, discounts, and product placement to maximize overall revenue.

Income elasticity of demand is another vital concept for businesses. Understanding how changes in consumer income affect demand for their products helps companies forecast sales, plan production, and target marketing efforts. Luxury goods manufacturers, for instance, pay close attention to income elasticity, as their products tend to have high income elasticity demand increases more than proportionally as income rises.

Product development teams also benefit from elasticity data. By analyzing cross-price and income elasticities, they can identify market gaps and opportunities for new products or product features that cater to specific consumer segments or price points. This information guides research and development efforts, ensuring that new offerings align with market demands and economic conditions.

For policymakers, elasticity concepts are invaluable tools for economic planning and policy formulation. Government agencies use income elasticity data to project future demand for public services as the economy grows or contracts. This helps in budgeting and resource allocation across various sectors such as healthcare, education, and infrastructure.

Tax policy is another area where elasticity plays a crucial role. Policymakers analyze the price elasticity of demand for various goods to determine the potential impact of tax changes. For products with inelastic demand, such as gasoline or cigarettes, governments may impose higher taxes knowing that consumption is less likely to decrease significantly, potentially generating more revenue for public programs.

In international trade, policymakers use cross-price elasticity to assess the potential effects of tariffs or trade agreements on domestic industries. Understanding how changes in the price of imported goods might affect demand for domestic products helps in crafting trade policies that protect local industries while promoting economic growth.

Environmental policy is yet another domain where elasticity concepts find application. Policymakers may use price elasticity data to estimate the effectiveness of carbon taxes or other environmental regulations in reducing consumption of polluting products. This information helps in designing policies that balance environmental goals with economic considerations.

In conclusion, cross-price elasticity of demand uses and the understanding of income elasticity of demand are fundamental to both business strategy and economic policymaking. These concepts provide a quantitative framework for analyzing market relationships, consumer behavior, and economic trends. By leveraging elasticity data, businesses can optimize their operations and stay competitive, while policymakers can craft more effective and targeted economic policies. As markets become increasingly complex and interconnected, the importance of these elasticity concepts in guiding decision-making processes is likely to grow even further.

Calculating Elasticity: Step-by-Step Guide

Understanding how to calculate cross elasticity and income elasticity of demand is crucial for economics students and professionals alike. This comprehensive guide will walk you through the process, providing clear examples and highlighting common pitfalls to avoid.

Cross Elasticity of Demand

Cross elasticity measures how the demand for one good changes in response to a price change in another related good. Here's how to calculate it:

  1. Formula: Cross Elasticity = (% Change in Quantity Demanded of Good A) / (% Change in Price of Good B)
  2. Step 1: Calculate the percentage change in quantity demanded of Good A
  3. Step 2: Calculate the percentage change in price of Good B
  4. Step 3: Divide the result from Step 1 by the result from Step 2

Example: Suppose when coffee prices increase by 10%, tea sales increase by 5%.

Cross Elasticity = 5% / 10% = 0.5

This positive result indicates that coffee and tea are substitutes.

Income Elasticity of Demand

Income elasticity measures how the demand for a good changes as consumer income changes. Here's the process:

  1. Formula: Income Elasticity = (% Change in Quantity Demanded) / (% Change in Income)
  2. Step 1: Calculate the percentage change in quantity demanded
  3. Step 2: Calculate the percentage change in income
  4. Step 3: Divide the result from Step 1 by the result from Step 2

Example: If consumer income increases by 8% and the demand for luxury cars increases by 12%:

Income Elasticity = 12% / 8% = 1.5

This result greater than 1 indicates that luxury cars are a normal good with elastic demand.

Common Pitfalls and How to Avoid Them

  • Mixing up the numerator and denominator: Always double-check your formula placement.
  • Forgetting to convert to percentages: Ensure you're working with percentage changes, not absolute values.
  • Misinterpreting negative values: Remember, negative cross elasticity indicates complementary goods.
  • Overlooking time frames: Be consistent with the time periods you're comparing.

When calculating how to find cross price elasticity or how to find income elasticity of demand, practice is key. Start with simple examples and gradually work your way up to more complex scenarios. Remember, the process to calculate income elasticity of demand is similar to cross elasticity, but you're focusing on income changes instead of price changes of another good.

As you become more comfortable with these calculations, you'll find that understanding how to find income elasticity becomes second nature. Always pay attention to the signs of your results and what they imply about the relationship between goods or income levels and demand.

By mastering these concepts, you'll gain valuable insights into consumer behavior and market dynamics. Keep practicing, and don't hesitate to seek clarification on any steps that seem unclear. With time and effort, you'll become proficient in elasticity calculations, a skill that's invaluable in economic analysis and decision-making.

Conclusion

Cross elasticity of demand and income elasticity of demand are crucial concepts in economics. Cross elasticity measures how the demand for one product changes in response to price changes in another, while income elasticity examines how demand shifts with changes in consumer income. The introduction video provides a solid foundation for understanding these concepts and their applications. Mastering the elasticity formula is essential for accurately calculating and interpreting these measures. To deepen your understanding, practice applying these formulas to real-world scenarios and explore more advanced elasticity concepts. Remember that elasticity values can be positive or negative, indicating complementary or substitute relationships between goods. By grasping these principles, you'll gain valuable insights into consumer behavior and market dynamics. Continue to engage with the topic by analyzing various product pairs and income levels, and consider how elasticity impacts pricing strategies and market forecasting. This knowledge will prove invaluable in your economic studies and future business applications.

Cross & Income Elasticity of Demand Overview:

Cross & Income Elasticity of Demand Overview: Cross Elasticity of Demand

  • Formula for Cross Elasticity of Demand
  • Do not take the absolute value
  • Positive    goods are substitutes
  • Demand curve for good shifts rightward
  • Negative    goods are complements
  • Demand curve for good shifts leftward

Step 1: Introduction to Cross Elasticity of Demand

In this section, we will explore the concept of cross elasticity of demand. Cross elasticity of demand measures the responsiveness of the quantity demanded for one good when the price of another good changes. This is particularly important for understanding the relationship between substitute and complementary goods.

Step 2: Understanding the Formula

The formula for calculating cross elasticity of demand is as follows:

  • Cross Price Elasticity = (Percentage Change in Quantity Demanded of Good X) / (Percentage Change in Price of Good Y)
Here, Good X is the good whose quantity demanded is being measured, and Good Y is the substitute or complement whose price is changing. It is important to note that we do not take the absolute value of the result.

Step 3: Interpreting Positive Cross Elasticity

If the cross elasticity of demand is positive, it indicates that the two goods are substitutes. This means that an increase in the price of Good Y will lead to an increase in the quantity demanded of Good X. For example, if the price of coffee increases, the demand for tea (a substitute) may increase as consumers switch to the cheaper alternative. Consequently, the demand curve for Good X shifts rightward.

Step 4: Interpreting Negative Cross Elasticity

If the cross elasticity of demand is negative, it indicates that the two goods are complements. This means that an increase in the price of Good Y will lead to a decrease in the quantity demanded of Good X. For example, if the price of printers increases, the demand for printer ink (a complement) may decrease as fewer printers are purchased. Consequently, the demand curve for Good X shifts leftward.

Step 5: Practical Application

To apply the cross elasticity of demand formula, follow these steps:

  • Determine the initial and new quantities demanded of Good X.
  • Calculate the percentage change in quantity demanded of Good X.
  • Determine the initial and new prices of Good Y.
  • Calculate the percentage change in price of Good Y.
  • Divide the percentage change in quantity demanded of Good X by the percentage change in price of Good Y to obtain the cross elasticity of demand.
This calculation will help you understand the relationship between the two goods and how changes in the price of one good affect the demand for the other.

Step 6: Conclusion

Understanding cross elasticity of demand is crucial for businesses and economists as it helps in making informed decisions about pricing strategies and market competition. By analyzing the cross elasticity of demand, one can determine whether goods are substitutes or complements and predict how changes in prices will impact demand.

FAQs

Here are some frequently asked questions about cross elasticity and income elasticity of demand:

1. What is the difference between cross elasticity and income elasticity of demand?

Cross elasticity of demand measures how the demand for one product changes in response to price changes in another related product. Income elasticity of demand, on the other hand, measures how the demand for a product changes in response to changes in consumer income. While cross elasticity focuses on the relationship between two products, income elasticity examines the relationship between income and demand for a single product.

2. How do you calculate cross elasticity of demand?

Cross elasticity of demand is calculated using the formula: (Percentage change in quantity demanded of Good A) / (Percentage change in price of Good B). For example, if a 10% increase in the price of coffee leads to a 5% increase in tea sales, the cross elasticity would be 0.5 (5% / 10%).

3. What does a positive income elasticity of demand indicate?

A positive income elasticity of demand indicates that the good is a normal good. This means that as consumer income increases, the demand for the product also increases. For example, if the income elasticity of demand for a product is 1.5, it means that for every 1% increase in income, the demand for the product increases by 1.5%.

4. Can income elasticity of demand be negative?

Yes, income elasticity of demand can be negative. This occurs for inferior goods, where demand decreases as income increases. For example, as people's incomes rise, they might buy less instant noodles and opt for more expensive food options, resulting in a negative income elasticity for instant noodles.

5. What are the practical applications of elasticity concepts?

Elasticity concepts have numerous practical applications in business and economics. They help companies develop pricing strategies, forecast demand changes, and make product development decisions. Policymakers use elasticity data to predict the effects of tax changes, design welfare programs, and assess the impact of economic policies on different sectors. Understanding elasticities is crucial for analyzing market dynamics and consumer behavior in various economic scenarios.

Prerequisite Topics

Understanding the foundations of economics is crucial for grasping more advanced concepts. When it comes to studying cross and income elasticity of demand, having a solid grasp of price elasticity of demand is essential. This prerequisite topic serves as a fundamental building block that directly relates to and enhances your comprehension of cross and income elasticity of demand.

Price elasticity of demand provides the necessary framework for understanding how consumers respond to price changes for a particular good or service. This concept is pivotal because it introduces the idea of measuring the sensitivity of demand to price fluctuations. By mastering price elasticity of demand, students develop a crucial analytical skill that directly applies to cross and income elasticity of demand.

The relationship between price elasticity and cross elasticity is particularly significant. While price elasticity focuses on a single product, cross elasticity expands this concept to examine how the demand for one good is affected by price changes in another related good. Without a solid understanding of price elasticity of demand, grasping the nuances of cross elasticity becomes challenging.

Similarly, income elasticity of demand builds upon the principles learned in price elasticity. It explores how changes in consumer income affect the demand for goods and services. The analytical approach used in calculating and interpreting price elasticity directly translates to income elasticity, making it an indispensable prerequisite.

Moreover, the mathematical and graphical representations used in price elasticity of demand lay the groundwork for more complex analyses in cross and income elasticity. Students who are comfortable with these representations find it easier to interpret and analyze the relationships between different economic variables in more advanced topics.

Understanding price elasticity also introduces key economic concepts such as elastic and inelastic demand, which are crucial for comprehending market dynamics. These concepts are directly applicable when studying how demand responds to changes in the prices of related goods (cross elasticity) or changes in income (income elasticity).

In conclusion, mastering price elasticity of demand is not just beneficial but essential for a comprehensive understanding of cross and income elasticity of demand. It provides the necessary conceptual framework, analytical skills, and economic intuition required to excel in more advanced elasticity topics. Students who invest time in thoroughly grasping this prerequisite will find themselves better equipped to tackle the complexities of cross and income elasticity, leading to a deeper and more nuanced understanding of consumer behavior and market dynamics.


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,

Cross - price elasticity = %  change  in  quantity  demanded%  change  in  price  of  substitute  or  complement\frac{\% \;change \;in \;quantity \;demanded}{\% \;change \;in \;price \;of \;substitute \;or \;complement}


The formula for cross elasticity of demand is


Cross - price elasticity = (Qx2−Qx1)/Qxavg(Py2−Py1)/Pyavg\frac{(Q_{x_2}-Q_{x_1})/Q_{x_{avg}}}{(P_{y_2}-P_{y_1})/P_{y_{avg}}}

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,


Income - price elasticity = %  change  in  quantity  demanded%  change  in  income\frac{\% \;change \;in \;quantity \;demanded}{\% \;change \;in \;income}


The formula for income elasticity of demand is


Income - price elasticity = (Q2−Q1)/Qavg(I2−I1)/Iavg\frac{(Q_{2}-Q_{1})/Q_{_{avg}}}{(I_{2}-I_{1})/I_{_{avg}}}

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.