Distinguish between Income Elasticity of Demand and Cross Elasticity of Demand.

Exercises · Q12

Q. Distinguish between Income Elasticity of Demand and Cross Elasticity of Demand.

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Concept understanding — Income Elasticity of Demand

Income elasticity of demand ( $E_y$ ) measures how responsive the quantity demanded of a good is to a change in consumer income, holding price constant. Its sign tells you whether a good is normal or inferior, and its magnitude tells you whether a normal good is a necessity or a luxury.

The sign of income elasticity classifies the good: positive → normal good (demand rises with income), negative → inferior good (demand falls as income rises). The magnitude then splits normal goods into necessities (0 < $E_y$ < 1) and luxuries ( $E_y$ > 1).

The formula and a worked illustration

E_y = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in income}} = \frac{\Delta Q / Q}{\Delta Y / Y}

Illustration: a consumer's income rises from ₹20,000 to ₹24,000 (a 20% rise) and monthly demand for restaurant meals rises from 10 to 13 (a 30% rise). Then $E_y = 30\% / 20\% = 1.5$ . Because $E_y > 1$ , restaurant meals are a luxury for this consumer.

Interpreting the values

Value of $E_y$	Type of good	Meaning
$E_y < 0$ (negative)	Inferior good	Demand falls as income rises (e.g. coarse grain, second-hand goods)
$E_y = 0$	Neutral	Demand unaffected by income (e.g. salt)
$0 < E_y < 1$	Normal — necessity	Demand rises, but less than proportionately (e.g. food, basic clothing)
$E_y = 1$	Unitary	Demand rises in the same proportion as income

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Basis	Income Elasticity of Demand	Cross Elasticity of Demand
Formula	$E_y=\dfrac{\%\Delta Q}{\%\Delta Y}$	$E_c=\dfrac{\%\Delta Q_x}{\%\Delta P_y}$
What varies	The consumer's own INCOME	The PRICE of a DIFFERENT, related commodity
Number of commodities involved	One commodity, related to the consumer's income	Two commodities, X and Y
What the sign shows	Positive = Normal Good (Luxury if $E_y>1$ , Necessity if $0<E_y<1$ ); Negative = Inferior Good	Positive = Substitutes; Negative = Complements; Zero = Unrelated goods
Example	Demand for cars rising as household income rises	Demand for coffee rising as the price of tea rises

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Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

CBSE 2024Set ANNUAL1 mark
$Q. Give economic term: Degree of responsiveness of quantity demanded to change in income only.$
›Reveal solutionSolution
The economic term is Income elasticity of demand — it measures how responsive quantity demanded is to a change in the consumer's income, other things constant. Answer: Income elasticity of demand.

Why: Elasticity of demand has three main types depending on the factor that changes:

Price elasticity — response of quantity demanded to a change in the good's own price.

Income elasticity — response of quantity demanded to a change in income (Ey = percentage change in quantity demanded / percentage change in income). …
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CBSE 2023Set ANNUAL1 markMCQ
$Q. The relationship between income and demand for inferior goods is ______.$
(a) direct
(b) inverse
(c) no effect
(d) can be direct and inverse
›Reveal solutionSolution
The relationship between income and demand for inferior goods is inverse — a rise in income leads to a fall in their demand (negative income elasticity).

Income elasticity of demand measures how the quantity demanded of a good responds to a change in the consumer's income.

For normal goods, the relationship is direct/positive — higher income raises demand. …
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CBSE 2020Set ANNUAL1 markMCQ
$Q. Fill in the blank using appropriate alternatives given in the brackets: Income elasticity of demand for inferior goods is _______.$
(a) positive
(b) negative
(c) zero
(d) greater than one
›Reveal solutionSolution

The correct alternative is negative.

Income elasticity of demand (Ey) links the change in quantity demanded to a change in income. For a normal good it is positive (income up, demand up). For an inferior good the relation is inverse — as income rises consumers switch to superior substitutes and buy less of the inferior good — so income elast …

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Q.Distinguish between Income Elasticity of Demand and Cross Elasticity of Demand.

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