Elasticity measures the responsiveness of one variable to changes in another. Beyond the price elasticity of demand and supply, we analyze the income elasticity of demand and cross-price elasticity of demand to understand broader market behaviours.
Income-Elasticity of Demand
Income elasticity shows how sensitive a product is to a change in income. Essentially, it shows if a good is normal or inferior.
If the coefficient is negative, then the good is inferior. If the coefficient is positive, then the good is normal. For example, if the income increases by 20% and the quantity decreases 15%, then the good is an inferior good.
Cross-Price Elasticity of Demand
Cross-price elasticity shows how sensitive a product is to a change in price of another good. Essentially, it shows if two goods are substitutes or complements. For example, if P increases by 20%, then quantity decreases 15%.
If the coefficient is negative (inverse relationship), then the goods are complements. If the coefficient is positive (direct relationship), then the goods are substitutes.