Elasticity: A Measure of Response
Read this chapter to learn about the concept of elasticity. Be sure to read Sections 5.1-5.4 following the introduction.
Responsiveness of Demand to Other Factors
Key Takeaways
- The income elasticity of demand reflects the responsiveness of demand to changes in income. It is the percentage change in quantity demanded at a specific price divided by the percentage change in income, ceteris paribus.
- Income elasticity is positive for normal goods and negative for inferior goods.
- The cross price elasticity of demand measures the way demand for one good or service responds to changes in the price of another. It is the percentage change in the quantity demanded of one good or service at a specific price divided by the percentage change in the price of another good or service, all other things unchanged.
- Cross price elasticity is positive for substitutes, negative for complements, and zero for goods or services whose demands are unrelated.