Distinguish between income elasticity of demand and cross elasticity of demand.

Exercises · Q11

Q. Distinguish between income elasticity of demand and cross elasticity of demand.

Yanam BieapTextbookSubjectiveImportance★★★★★

21% · 6/29 Questions

🔒 Locked · start free trial →

You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.

Start your 14-day free trial to unlock the full solution →

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

Start your 14-day free trial to unlock the full solution →

Basis	Income Elasticity ( $E_i$ )	Cross Elasticity ( $E_c$ )
What it relates	% change in quantity demanded of a good to % change in the CONSUMER'S INCOME	% change in quantity demanded of one good ( $x$ ) to % change in the PRICE OF A RELATED GOOD ( $y$ )
Formula	$E_i = \dfrac{\%\Delta Q_d}{\%\Delta Y}$	$E_c = \dfrac{\%\Delta Q_{dx}}{\%\Delta P_y}$
Sign tells us	Negative = inferior good; between 0 and 1 = necessity; above 1 = luxury/superior good	Positive = substitutes; negative = complements; near zero = unrelated goods
Involves	ONE good and income	TWO related goods and their prices

Start your 14-day free trial to unlock the full solution →

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

CA Foundation 2026Set may-20261 markMCQ
$Q. For a household suppose the income elasticity of a commodity is arrived at 0.5; what can be assumed about the nature of the good? (A) It is a luxurious good (B) It is an inferior good (C) It has a zero income elasticity (D) It is a normal good and fulfils a necessity$
›Reveal solutionSolution
Income elasticity of +0.5 (positive, but less than 1) means a normal good that is a necessity.

Step 1 — Recall the rule

Income elasticity of demand $E_Y$ classifies goods by sign and size:
$E_Y = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in income}}$

$E_Y < 0$ → inferior good

$E_Y = 0$ → income-inelastic (demand unchanged)

$0 < E_Y < 1$ → normal good, a necessity

$E_Y > 1$ → normal good, a luxury

Step 2 — Apply the given value

Here $E_Y = 0.5$ . It is positive, so the good is normal (demand rises with income). It is less than 1, so demand rises less than proportionately with income — the mark of a necessity.

Step 3 — Why the other options are wrong

(A) Luxury would need $E_Y > 1$ .

(B) Inferior would need $E_Y < 0$ . …
Start your 14-day free trial to see the full solution →
CA Foundation 2024Set sep-20241 markMCQ
$Q. If the income elasticity of a specific types of goods is greater than one, what does it suggest about the goods ? (A) It is an inferior goods. (B) It is a normal goods. (C) It is a necessity goods. (D) It is a luxury goods.$
›Reveal solutionSolution
Income elasticity greater than one identifies a luxury good.

Step 1 — Recall income elasticity ranges
$E_y = \frac{\%\Delta \text{Quantity Demanded}}{\%\Delta \text{Income}}$

$E_y < 0$ → inferior good

$0 < E_y < 1$ → normal necessity

$E_y > 1$ → luxury good (superior good)

Step 2 — Apply to the stem

Since $E_y > 1$ , demand grows faster than income; consumers devote a rising proportion of income to the good. This is the defining property of a luxury good.

Step 3 — Why the other options are wrong

(A) Inferior goods — would need $E_y < 0$ .

(B) Normal goods — a broad class ( $E_y > 0$ ); true but not specific, whereas $E_y>1$ pins it to a luxury (which is the precise answer expected). …
Start your 14-day free trial to see the full solution →

←Previous questionQ10 — Explain the different degrees of price elasticity of demand.→Next questionQ12 — Explain the important factors that determine the elasticity of demand …

Q.Distinguish between income elasticity of demand and cross elasticity of demand.

🎓Unlock everything free for 14 days

Unlock everything free for 14 days