Income Elasticity of

Demand
Rhyan Mike Bacaro
INCOME ELASTICITY OF DEMAND

 Unlike price elasticity, income elasticity of demand is the degree

of
responsiveness of a percentage change in quantity demanded with a
percentage change in income.
Qd2 – Qd1
Qd2 + Qd1
% change in Qd 2
Income Elasticity of Demand= =
% change in Y Y2 – Y1
Y2 + Y1
2
Where: Qd is the quantity demanded and Y is income
INCOME ELASTICITY OF DEMAND
IED INTERPRETATION
>1 Normal Good
<1 Inferior Good

 When the result of the income elasticity is positive or greater than 1, the good is a normal
good. This happens when an increase e in a consumer’s income has caused a substantial
increase in demand for the product.
 When the resulting income elasticity is negative or less than 1, the good is said to be
inferior: A good becomes inferior when an increase income brings about a decrease in
demand for product
INCOME ELASTICITY OF DEMAND

Example 1:
Chris earns a monthly income of Php5,000 and she consumes
Php1,000 worth of chicken per month, the price of chicken is Php100 per
kilo. When her income increased by Php2,500/month she started to
consume Php2,000 worth of chicken meat a month. Is Chris’s demand for
chicken meat normal or inferior?
Chris earns a monthly income of Php5,000 and she consumes Php1,000 worth of chicken per month, the
price of chicken is Php100 per kilo. When her income increased by Php2,500/month she started to
consume Php2,000 worth of chicken meat a month. Is Chris’s demand for chicken meat normal or inferior?
INCOME ELASTICITY OF DEMAND

Example 2:
Every month, Mang Ernesto earns Php5,000 as fishball vendor.
During this period. He also consumes Php100 worth sardines which cost
20 pesos per can. When his income increased by Php2,500, he began his
consumption of sardines to Php40. From the given, is sardines normal or
inferior good to Mang Ernesto?
Every month, Mang Ernesto earns Php5,000 as fishball vendor. During this period. He also consumes Php100 worth
sardines which cost 20 pesos per can. When his income increased by Php2,500, he began his consumption of sardines to
Php40. From the given, is sardines normal or inferior good to Mang Ernesto?
CROSS ELASTICITY OF DEMAND

 Is the degree of responsiveness of a percentage change in quantity of a good with a

percentage change in price of other goods. A positive cross elasticity indicates that a good
is a substitute of the other while a negative cross elasticity means the goods are
complementing each other.

Cross of Demand Relation of Goods

> 0, positive Substitute
< 0, negative Complements
 CROSS ELASTICITY OF DEMAND

 In economics, the percentage change in demand for the first good in response to the percentage
change in price of the second good is expressed in this mathematical formula:

Qd2 – Qd1
Qd2 + Qd1
% change in demand for product X 2
Cross Elasticity of Demand= =
% change in price of product Y P2 – P1
P2 + P1
2

note: upper portion of the fraction(quantity) refers to product X, and the lower portion (price)
refers to product Y
CROSS ELASTICITY OF DEMAND

Example 1:

Good Qd1 Qd2 P1 P2

X (Water) 5 8 10 8
Y (Soda) 10 8 15 20
CROSS ELASTICITY OF DEMAND

Example 2:

Good Qd1 Qd2 P1 P2

X (Coffee) 15 10 35 40
Y (Sugar) 20 14 15 20