Back to basics part 4 : YED & XED

What is income elasticity of demand (YED) ? 

• YED is a measure of how much the demand for a product changes when there is a change in the consumer's income

The value range of YED:

• YED (+) = normal good
• YED (-) = inferior good
• 0 < YED > 1 = income inelastic - change in income results in a more than proportionate change in quantity demanded
• YED > 1 = income elastic - change in income results in a less than proportionate changed in quantity demanded

YED can be illustrated on a diagram called the 'Engel Curve' :

What is cross elasticity of demand (XED) ?

• XED is a measure of how much demand for a product changes when there is a change in price of another product

The value range of XED:

• XED (+) = products are substitutes
• XED (-) = products are complements