2.5 Other Elasticities

Cross-Price Elasticity of Demand

Cross-price elasticity of demand (XED) measures how the quantity demanded of one good responds to a change in the price of another good: %ΔQd of good A ÷ %ΔP of good B. A positive XED means the goods are substitutes (price of B rises, demand for A rises). A negative XED means the goods are complements (price of B rises, demand for A falls).

Income Elasticity of Demand

Income elasticity of demand (YED) measures how quantity demanded responds to a change in consumer income: %ΔQd ÷ %ΔIncome. A positive YED means the good is normal (demand rises with income); if YED > 1, it's a luxury good. A negative YED means the good is inferior (demand falls as income rises).

Why These Elasticities Matter

These measures let economists classify relationships between goods and predict consumer behavior. Firms use XED to identify competitors/complementary products for pricing strategy, while YED helps predict how demand shifts during economic growth or recession, guiding production and marketing decisions.

Key terms

Cross-price elasticity of demand (XED)

%ΔQd of good A ÷ %ΔP of good B; measures how demand for one good responds to a price change in another.

Positive XED

Indicates the two goods are substitutes.

Negative XED

Indicates the two goods are complements.

Income elasticity of demand (YED)

%ΔQd ÷ %ΔIncome; measures how demand responds to changes in consumer income.

Inferior vs. Normal vs. Luxury goods

Inferior: YED < 0. Normal: YED > 0. Luxury: YED > 1 (a subtype of normal goods).

Try an AP-style question

The good is…

1. normal
2. inferior
3. a luxury
4. a complement