Answer to Question #222825 in Economics of Enterprise for Cebo

Question

Distinguish between income elasticity of demand and cross price elasticity of demand. Include in your answer a provision of their formula.

Answer 1

Income elasticity of demand measures how demand responsed to a change in income which is always negative for an inferior good and positive for a normal good. The quantity demanded of an inferior good falls as income rises, whereas demand for a normal rises with income.

We can find price elasticity of demand by;

Income elasticity of demand$=$ $\frac {proportionate change in quantity demanded}{proportionate change in income}$

Cross elasticity of demand measures the responsiveness of demand for one commodity to change in the price of another good. The cross elasticity of demand between two goods or services indicates the nature of the demand relationship between the goods.

Cross elasticity of demand for a good A with respect to to the price of B$=$

$\frac {proportionate change in quantity of A demanded}{proportionate change in price of B}$