Micro CHAPTER 2.5:

Other Elasticities

CHAPTER SUMMARY

There are two other types of elasticities besides price elasticity: Income Elasticity of Demand (YED) and Cross-Price Elasticity (XED).

Income Elasticity of Demand

YED measures the impact of a change in people's real income (the total amount of stuff they can buy) on demand. The calculation for YED is:

(% Change in Quantity Demanded) / (% Change in Real Income)

If an increase in real income leads to an increase in quantity demanded, a good is called a normal good. An increase in incomes would cause the demand curve to shift to the right.

However, if an increase in real income causes people to demand less of something (or vice versa), that is considered an inferior good. This is less common, but does exist in the real world. For example, if real incomes go down, people might not be able to afford new cars, so demand for old, used cars would increase. For inferior goods, an increase in incomes would cause the demand curve to shift to the left.

Cross-Price Elasticity

XED measures the impact of a change in price in one good on demand for another. This is usually used for substitutes and complements. Because cereal and eggs are both commonly eaten for breakfast in America, an increase in the price of eggs might cause some people to switch to cereal, increasing demand for cereal. Meanwhile, people who eat eggs often add pepper to them, so those same people who switched to cereal might stop buying pepper, decreasing demand for pepper. These are cross-price effects of eggs on their substitutes and complements. XED is calculated using the following formula:

(% Change in Quantity Demanded of the affected good) / (% Change in price of the original good)

In our example, we would be measuring the % change in quantity demanded of cereal or pepper, and dividing it by the % change in the price of eggs. Generally, if the result is a negative number, it means the goods are complements. If the result is a positive number, it means the goods are substitutes.

CHAPTER VIDEOS

(Just section 2.5)

CHAPTER READINGS

Other Elasticities | FiveableLearn about other types of elasticities like income elasticity and cross-price elasticity! Practice with included sample problems and formulas.

What You Need to Know About Elasticity Coefficients - ReviewEcon.comEverything you need to know about elasticity before your next AP, IB, or College Microeconomics Exam. Learn price elasticity of demand, the total revenue test, calculating elasticity coefficients, cross price elasticity, income elasticity, and price elasticity of supply.

CHAPTER PRACTICE

Albert | Learn by doing | Grades 5-12 reading, writing, math, science, and test prepAlbert provides students with personalized learning experiences in core academic areas while providing educators with actionable data. Leverage world-class, standards aligned practice content for AP, Common Core, NGSS, SAT, ACT, and more.

15 Question Elasticity Coefficient Game - AP/IB/College - ReviewEcon.com15 question review game with both mid-point and end-point coefficient calculations as well as coefficient interpretations. For AP, IB, or College.

EXTENSION

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