1. Elasticity . . .
… allows us to analyze supply and demand with greater precision.
… is a measure of how much buyers and sellers respond to changes in market conditions

2. Income Elasticity of Demand
Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumers’ income.
It is computed as the percentage change in the quantity demanded divided by the percentage change in income.

3. Computing Income Elasticity

4. Income Elasticity Types of Goods
Normal Goods
Inferior Goods
Higher income raises the quantity demanded for normal goods but lowers the quantity demanded for inferior goods.

5. Goods consumers regard as necessities tend to be income inelastic
Income Elasticity
Goods consumers regard as necessities tend to be income inelastic
Examples include food, fuel, clothing, utilities, and medical services.
Goods consumers regard as luxuries tend to be income elastic.
Examples include sports cars, furs, and expensive foods.

6. Cross elasticity of demand (XED)
Cross elasticity of demand (XED) is the responsiveness of QD of Good A to a change in the price of Good B
It is a measure of the extent to which the quantity demanded of a good changes when the price of a substitute or complement changes, other things remaining the same (ceteris paribus)

7. Cross elasticity of demand (XED)
Cross elasticity of demand (XED) is the responsiveness of QD of Good A to a change in the price of Good B
Formula: Percentage change in QD Good A/Percentage change in the price of Good B

8. Cross elasticity of demand (XED)
Example
Suppose that when the price of a burger falls by 10%, the quantity of pizza demanded decreases by 5%. The Cross elasticity of demand for pizza with respect to a change in the price of burgers is:
XED = -5/-10 = 0.5
These products are substitutes as the XED is positive. A fall in the price of one good brings a decrease in the quantity demanded of the other good

9. Cross elasticity of demand (XED)
Example
Suppose that when the price of a soft drink falls by 10%, the quantity of pizza demanded increases by 2%. The Cross elasticity of demand for pizza with respect to a change in the price of soft drinks is:
XED = +2/-10 = -0.2
These products are complements as the XED is negative. A fall in the price of one good brings an increase in the quantity demanded of the other good

10. Summary
The income elasticity of demand measures how much the quantity demanded responds to changes in consumers’ income.
Normal goods have a positive sign
Inferior goods have a negative sign
The larger the number the closer the relationship between change in income and change in QD

11. Summary
The cross-price elasticity of demand measures how much the quantity demanded of one good responds to the price of another good.
Substitutes have a positive sign
Complements have a negative sign
The larger the number the closer the relationship between the two goods