Question

# 2. What is the income elasticity of demand? How can it be used to determine whether...

2. What is the income elasticity of demand? How can it be used to determine whether a good is a normal good or an inferior good? What is the cross-price elasticity of demand? How can it be used to determine whether two goods are substitutes or compliments?

Income elasticity of demand is defined as the degree of responsiveness in quantity demand for a good due a change in income of the consumer. It can be calculated as:

IED = % change in quantity demanded of a good / % change in income of the consumer

A positive income elasticity of demand is associated with normal goods, where as a negative income elasticity of demand is associated with inferior goods.

Cross-price elasticity of demand is defined as the degree of responsiveness in quantity demand for one good (good X) due a change in the price of another good (good Y).

It can be calculated as:

CPED = % change in quantity demanded for a good X / % change in the price of good Y

A positive cross-price elasticity of demand is associated with substitute good, where as a negative cross-price elasticity of demand is associated with complementary good.

#### Earn Coins

Coins can be redeemed for fabulous gifts.