Income and cross-price responses
| English | 中文 | Pinyin |
|---|---|---|
| cross elasticity of demand/krɒs ɪlæˈstɪsɪti ɒv dɪˈmænd/ | 需求交叉弹性 | xū qiú jiāo chā tán xìng |
| income elasticity of demand/ˈɪŋkʌm ɪlæˈstɪsɪti ɒv dɪˈmænd/ | 需求收入弹性 | xū qiú shōu rù tán xìng |
A decision you can investigate
- A rail operator considers forecasts based on incomes and the price of a competing coach service.
- Own-price, income and another product’s price are three different stimuli.
Build the explanation
- YED = percentage quantity-demanded change
- percentage income change. Positive values identify normal goods, negative values inferior goods for the observed group/range. Positive magnitude above 1 is income-elastic; between 0 and 1 income-inelastic; zero means no response. Perfect income elasticity is a theoretical limiting case of arbitrarily large responsiveness to a tiny income change.
- XED = percentage demand change for A
- percentage price change of B. Positive XED suggests substitutes, negative complements, and approximately zero little measured relationship. Magnitude indicates responsiveness, not whether two products are physically similar.
Work through the evidence
- Income rises from 3000 to 3300, or 10%; rail journeys rise from 40 to 46, or 15%. YED=15/10=1.5: an income-elastic normal service in this observation.
- Coach fare rises 8%, while rail demand rises 4% with other conditions unchanged: XED rail relative to coach = 4/8=0.5, consistent with substitution. If parking becomes 10% dearer and car journeys fall 3%, XED car journeys relative to parking = −3/10=−0.3, consistent with complementarity.
What is rail YED in the income case?
Demand rises 15% while income rises 10%.
Test the limits
- A product can change category across income groups or ranges. An inferior classification describes the income response, not defective quality. XED of A to B need not equal XED of B to A.
- Business forecasts need population, prices and confidence too; simultaneous changes can confound attribution. A government assessing indirect taxes or subsidies should ask whether consumers can switch and who bears the cost, not simply read a sign as a complete recommendation.
What sign is expected for complementary goods?
A dearer complement can reduce demand for the associated good.
Cross elasticity must have the same value whichever product is placed in the numerator.
The percentage demand and price bases and responses can differ.
Apply and explain your answer
- What does the positive cross response between coach fare and rail demand suggest?
- Some passengers treat the two services as substitutes; rail demand increases when coach fare rises.
A YED of −0.4 identifies
The negative income response distinguishes the classification.
Use the terms precisely
- cross elasticity of demand 需求交叉弹性: Percentage demand change for one good relative to percentage price change of another.
- income elasticity of demand 需求收入弹性: Percentage demand change relative to percentage income change.
Match the terms to their meanings.
Use each term for its stated economic relationship.
Income rises from 3000 to 3300, or 10%; rail journeys rise from 40 to 46, or 15%. YED=15/10=1.5: an income-elastic normal service in this observation. Coach fare rises 8%, while rail demand rises 4% with other conditions unchanged: XED rail relative to coach = 4/8=0.5, consistent with substitution. If parking becomes 10% dearer and car journeys fall 3%, XED car journeys relative to parking = −3/10=−0.3, consistent with complementarity.
A product can change category across income groups or ranges. An inferior classification describes the income response, not defective quality. XED of A to B need not equal XED of B to A. Business forecasts need population, prices and confidence too; simultaneous changes can confound attribution. A government assessing indirect taxes or subsidies should ask whether consumers can switch and who bears the cost, not simply read a sign as a complete recommendation.
YED = percentage quantity-demanded change