Income elasticity of demand (YED) and Cross elasticity of demand (CED)

The income elasticity of demand measures the responsiveness of the quantity demanded of a good to the change in the income of the people demanding the good. It is calculated as the ratio of the percent change in quantity demanded to the percent change in income.

Categories of income elasticity:

A negative ( E_i<0 ) income elasticity of demand is associated with inferior goods. Inferior good's demand falls as consumer income increases. An increase in income will lead to a fall in the quantity demanded and may lead to changes to more luxurious substitutes.

A positive income elasticity of demand (E_i >0)is associated with normal goods; an increase in income will lead to a rise in the quantity demanded. If income elasticity of demand of a commodity is less than 1, it is a necessity good. If the elasticity of demand is greater than 1, it is a luxury good or a superior good.

A zero income elasticity (or inelastic) demand occurs when an increase in income is not associated with a change in the quantity demanded of a good.

Cross elasticity of demand (CED) is a numerical measure of the responsiveness of the quantity demanded of product X to a change in price of product Y.

E_xy = Persantage changes in Quantity demanded of good X

Persantage changes in Price of good Y

If a cross-price elasticity is positive (E_xy>0), two goods are substitutes.

If a cross-price elasticity is negative, (E_xy<0) two goods are complements.

If a cross-price elasticity is zero or near 0 (E_xy=0), two goods are independent.

Дата добавления: 2015-11-16