Income and Cross Elasticities of Demand

The module discusses two types of elasticities: income and cross elasticities of demand. Income elasticity measures the responsiveness of quantity demanded for a product to changes in income. Normal goods have a positive income elasticity, but there are two types of normal goods: luxury goods and necessities. Inferior goods have a negative income elasticity. Cross elasticity measures the responsiveness of quantity demanded for one product to changes in the price of another separate product. Complements have a negative cross elasticity, while substitutes have a positive cross elasticity. The strength of the relationship can be determined by the value of the coefficient. A value of zero indicates no relationship. The formulas for calculating both elasticities are similar to the formula for price elasticity of demand.