Income Elasticity and Cross Elasticity of Demand

This lesson covers two further measures of elasticity: income elasticity of demand (YED) and cross elasticity of demand (XED). These concepts allow economists to analyse how demand responds to changes in income and to changes in the prices of related goods. Both are important for understanding consumer behaviour, business strategy, and government policy at A-Level.

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Income Elasticity of Demand (YED)

Key Definition: Income elasticity of demand (YED) measures the responsiveness of the quantity demanded of a good to a change in consumer income, ceteris paribus.

The YED Formula

YED = Percentage change in quantity demanded / Percentage change in income

YED = (%ΔQd) / (%ΔY)

Unlike PED, the sign of YED is economically meaningful — it tells us whether the good is normal or inferior.

Worked Example

A consumer's income rises from £30,000 to £33,000 per year (a 10% increase). Their demand for organic food increases from 50 units per month to 60 units per month (a 20% increase).

YED = +20% / +10% = +2.0

This is positive and greater than 1, indicating organic food is a normal good with income-elastic demand — a luxury.

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