Answer to Question #294472 in Microeconomics for aashi

Question

Explain the concept of income elasticity and cross price elasticity. Also explain how the nature of commodity is determined by positive and negative values of income elasticity.

Answer 1

Explain the concept of income elasticity and cross price elasticity.

Income elasticity of demand measures how demand responds to a change in income and is always negative for an inferior good and positive for a normal good. Cross elasticity of demand on the other hand measures the responsiveness of demand for one commodity to changes in the price of another good. For instance, when consumer income contrasts, it can have an impact on demand and this is called the income elasticity of demand. Likewise, if two goods are supplements, a change in demand for one can have an impact on the demand for the other and this is what we call cross-price elasticity of demand.

Explain how the nature of commodity is determined by positive and negative values of income elasticity.

Price elasticity of demand is always negative. However, Income elasticity can be positive or negative. For most goods it will be positive, that is if income increases, demand for the commodity also increases, on the other hand, if income decreases, demand for the commodity decreases.