2.5 Other Elasticities
Income elasticity (%ΔQd ÷ %Δincome) separates normal (+) from inferior (−) goods; cross-price elasticity separates substitutes (+) from complements (−).
Income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income. A positive value means a normal good (demand rises with income); a negative value means an inferior good (demand falls as income rises — think instant noodles).
Cross-price elasticity of demand is the percentage change in quantity demanded of good X divided by the percentage change in the PRICE of good Y. Positive means substitutes (pricier Coke raises Pepsi demand); negative means complements (pricier consoles lower game demand); near zero means the goods are unrelated.
For both measures the sign IS the answer, so never take absolute value the way you do with price elasticity of demand. Exam questions usually give the two percentage changes and ask you to classify the goods — divide, keep the sign, and name the relationship.
Key terms for 2.5
Dropping the sign. For income and cross-price elasticity the sign carries the meaning (normal vs inferior, substitute vs complement) — taking absolute value, correct for PED, destroys the answer here.
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