Cross Elasticity of Demand:
This measures how sensitive consumer purchases of one product (X) are to a change in the price of some other product (Y)


Substitute Goods

• Cross elasticity of demand is positive if the sales of product X moves in the same direction as a change in the price of product Y
• larger positive cross-elasticity coefficient = greater substitutability between the two products

Complementary Goods

• Cross elasticity is negative: increase in price of product X decreases the demand for product Y
• Larger negative cross-elasticity coefficient = greater complementarity between the two goods

Independent Goods

• Zero/near-zero cross elasticity = two products are unrelated
• A change in one product's price has no effect on the other product's demand

Application

• A product's substitutability, measured by the cross-elasticity coefficient, is important in businesses and government because the demand for their products is directly affected by the price of other products.

Income Elasticity of Demand:
Remember: income is a determinant of demand!

This measures the degree to which consumers respond to a change in their incomes by buying more or less of a particular good.


Inferior Goods

• A negative income-elasticity coefficient represents an inferior good (Ex. retread tires, cabbage, used clothing).
• A negative coefficient means that the income and quantity demanded move in opposite directions. i.e. as the income increases, the demand for the good decreases meaning it is inferior

Normal Goods

• A positive income-elasticity coefficient represents a normal good; income and quantity demanded move in same direction

Insights

• Coefficients of income elasticity of demand provide insights into the economy and helps explains why events are happening in the economy.