# Cross & income elasticity of demand

##### Intros

###### Lessons

**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

__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

**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.- 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.
**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- If Patsy's income increases from $50 to $100 a week., she increases her demand for chocolate from 2 kg to 5 kg.

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###### Topic 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,

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

The formula for cross elasticity of demand is

*Cross - price elasticity =*$\frac{(Q_{x_2}-Q_{x_1})/Q_{x_{avg}}}{(P_{y_2}-P_{y_1})/P_{y_{avg}}}$

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 =*$\frac{\% \;change \;in \;quantity \;demanded}{\% \;change \;in \;income}$

The formula for income elasticity of demand is

*Income - price elasticity =*$\frac{(Q_{2}-Q_{1})/Q_{_{avg}}}{(I_{2}-I_{1})/I_{_{avg}}}$

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.

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