Short on time? This page is the recap. For explanations, graphs and worked examples, use the full study guide.
Recap
- Elasticity can be measured for any determinant of demand or supply: % change in quantity ÷ % change in the cause.
- Income elasticity of demand (YED) shows how quantity demanded responds to a change in income. Its sign shows whether a good is normal or inferior.
- Cross-price elasticity of demand (XED) shows how quantity demanded of one good responds to a change in the price of another good. Its sign shows whether the goods are substitutes, complements or not related.
- The size shows how strong the response is: a large positive XED means close substitutes; a large negative XED means strong complements.
- Changes in income or in a related good’s price shift the demand curve. They are not movements along it.
Key relationships
| Relationship | How to use it |
|---|---|
| YED = % change in Qd ÷ % change in income | keep the sign |
| XED = % change in Qd of X ÷ % change in price of Y | name X and Y; keep the sign |
| % change = change ÷ average of the two values × 100 | midpoint method, for two values of each |
| % change in Qd = elasticity × % change in the cause | for predictions |
| Result | Meaning | When the cause rises, demand curve… |
|---|---|---|
| YED > 0 | normal good | shifts right |
| YED < 0 | inferior good | shifts left |
| XED > 0 | substitutes | shifts right |
| XED < 0 | complements | shifts left |
| YED or XED = 0 | unrelated | does not move |
Background only: YED above 1 is often called income elastic (many luxuries); YED between 0 and 1 is income inelastic (many necessities).
Assumptions
- Each elasticity changes one cause and holds everything else constant, including the good’s own price.
- The result applies to the range of values you measured.
Mistakes to avoid
- Dropping the minus sign, which turns an inferior good into a normal one, or complements into substitutes.
- Dividing raw changes instead of percentage changes.
- Putting the cause on top: quantity always goes in the numerator.
- Calling complements “positive” because they are used together.
- Drawing a movement along the curve for a change in income or in another good’s price.
- Using the total revenue test with YED or XED.
Quick self-check
- Income rises 10% and the quantity demanded of a good falls 5%. What is YED, and what type of good is it? (−5 ÷ 10 = −0.5: inferior.)
- The price of good Y rises 20% and the quantity demanded of good X rises 30%. What is XED, and how are the goods related? (30 ÷ 20 = +1.5: substitutes.)
- Two goods are strong complements. The price of one falls. What happens to demand for the other? (It increases: the curve shifts right.)
Next: practice questions.