Income & Cross Elasticity of Demand

In this article, we will have an understanding of the Income & Cross Elasticity of Demand. This topic is very important for the SSC exam as well as for other competitive exams. The concept of income and cross elasticity of demand provides a base for the overall understanding of the change in price & demand associated problems in an economy and also provides a conceptual theme to understand inflation as well. The topic always plays an important role in boosting your marks and especially a major role in SSC CGL EXAM and Banking exams of all levels.

Income Elasticity of Demand – Income elasticity of demand refers to the changes in the demand for a certain good with the changes in the real income of consumers, who buy it keeping all other things constant. It is the percentage change in quantity demanded divided by the percentage change in income.

In general, the income elasticity of demand is positive, which means that with the rise in income, demand for most products also increases. However, for some goods, this principle does not apply, as the higher income group prefers to buy cheap products. When the income elasticity of goods is negative, those goods are called inferior goods. When the income elasticity is positive, the goods are called normal goods.

Cross Elasticity of Demand: Cross Elasticity of Demand is an economic concept that measures the response to the quantity demanded of one good when the price of another good change. It is also called cross-price elasticity of demand. It is calculated by dividing the percentage change in the quantity demanded of one good by the percentage change in the price of another good. e.g. Cheap plane tickets lead to fewer train tickets, and vice versa.

Substitute Goods : 

Substitute goods are a set of goods that satisfy more or less similar wants and that can be used in each other’s place. Substitute goods have positive cross-price elasticities of demand, eg. coffee, and tea, a higher price for coffee will mean greater consumption of tea, which means if the price of coffee increases people will look for substitutes like tea which has comparatively low prices. 

Complementary Goods :

Complementary goods are those goods that are either jointly used or one good provide a sense of accomplishment or is used to add value to another good. Complementary goods have negative cross-price elasticities means a rise in the price of one good will impact the consumption or demand or price of another good. Eg. tea, and sugar, a higher price for sugar will mean a lower consumption of tea. The higher price of blades with certainly impact the price of Razor.