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# Income and Cross Elasticity

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### Income and Cross Elasticity

1. 1. INCOME AND CROSS ELASTICITY PRESENTED BY: Manvi agarwal
2. 2. This session  Demand elasticities we will discuss are :  Income elasticity of demand  Cross elasticity of demand
3. 3. Income elasticity of demand    Where the quantity demanded is determined by the income of the consumers. In other words , Income elasticity of demand measures the responsiveness of quantity demanded to changes in real income. As income ↑ demand for the good increases so, quantity demanded at the same price also usually ↑ .
4. 4. Contd..  ey = % change in quantity demanded of the product % change in consumers’ income  Example:  A rise in consumer real income of 7% leads to an 9.5% rise in demand for pizza deliveries.  The income elasticity of demand: = 9.5/ 7 = +1.36
5. 5. Contd.. Goods with a positive income elasticity of demand (demand ↑ if income ↑ or demand decreases if income decreases) – are normal goods. Goods with a negative income elasticity of demand (demand ↑ if income decreases and decreases if income ↑) – are inferior goods.
6. 6. Contd..    Normal goods can further be classified as luxury or essential goods. If income elasticity of demand is greater than one – luxury good. If income elasticity of demand is less than one – essential good.
7. 7. Effect Income elasticity coefficient Classification of good A proportionately larger change in the quantity demanded >1 Luxury good A proportionately smaller change in the quantity demanded <1 Normal A negative change in the quantity demanded <0 Inferior good
8. 8. FEW EXAMPLES Luxury Normal Necessity Inferior Good Air travel Fresh vegetables Frozen vegetables Fine wines Instant coffee Cheap snacks Luxury chocolates Natural cheese Processed cheese Private education Fruit juice Cheap oils Private health care Spending on utilities Tinned meat Antique furniture Shampoo / toothpaste / detergents Value “own-brand” bread Designer clothes Rail travel Bus travel
9. 9. Cross elasticity of demand  Measures the responsiveness of quantity demanded of a particular good to changes in the price of a related good.  ec = % change in quantity demanded of the product A % change in the price of product B  For substitutes >> cross elasticity of demand is positive For complements >> cross elasticity of demand is negative For unrelated goods >> cross elasticity of demand is zero  
10. 10.  Examples…  What happens to Qd of butter if the price of margarine increases.  What happens to Qd of chips if the price of fish increases.  What happens to the Qd of pencils if the price of coke increases.  Obviously NO EFFECT !! As these goods are not related ..
11. 11. THANK YOU