are substitutes or complements With price elasticity of demand we were concerned with whether the measured absolute value of this elasticity was greater than, less than, or equal to 1, because this gave us information about what happens to total revenue as price changes The terms elastic and inelastic apply to price elasticity of demand They are not used to describe income elasticity of demand or cross price elasticity of demand KEY TAKEAWAYS The income elasticity of demand reflects the responsiveness of demand to changes in income It is the percentage change in quantity demanded at a specific price divided by the percentage change in income, ceteris paribus Income elasticity is positive for normal goods and negative for inferior goods The cross price elasticity of demand measures the way demand for one good or service responds to changes in the price of another It is the percentage change in the quantity demanded of one good or service at a specific price divided by the percentage change in the price of another good or service, all other things unchanged Cross price elasticity is positive for substitutes, negative for complements, and zero for goods or services whose demands are unrelated TRY IT! Suppose that when the price of bagels rises by 10%, the demand for cream cheese falls by 3% at the current price, and that when income rises by 10%, the demand for bagels increases by 1% at the current price Calculate the cross price elasticity of demand for cream cheese with respect to the price of bagels and tell whether bagels and cream Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 263