# 5.4 Elasticity in areas other than price

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By the end of this section, you will be able to:

• Calculate the income elasticity of demand and the cross-price elasticity of demand
• Calculate the elasticity in labor and financial capital markets through an understanding of the elasticity of labor supply and the elasticity of savings
• Apply concepts of price elasticity to real-world situations

The basic idea of elasticity—how a percentage change in one variable causes a percentage change in another variable—does not just apply to the responsiveness of supply and demand to changes in the price of a product. Recall that quantity demanded (Qd) depends on income, tastes and preferences, the prices of related goods, and so on, as well as price. Similarly, quantity supplied (Qs) depends on the cost of production, and so on, as well as price. Elasticity can be measured for any determinant of supply and demand, not just the price.

## Income elasticity of demand

The income elasticity of demand is the percentage change in quantity demanded divided by the percentage change in income.

For most products, most of the time, the income elasticity of demand is positive: that is, a rise in income will cause an increase in the quantity demanded. This pattern is common enough that these goods are referred to as normal goods . However, for a few goods, an increase in income means that one might purchase less of the good; for example, those with a higher income might buy fewer hamburgers, because they are buying more steak instead, or those with a higher income might buy less cheap wine and more imported beer. When the income elasticity of demand is negative, the good is called an inferior good    .

The concepts of normal and inferior goods were introduced in Demand and Supply . A higher level of income for a normal good causes a demand curve to shift to the right for a normal good, which means that the income elasticity of demand is positive. How far the demand shifts depends on the income elasticity of demand. A higher income elasticity means a larger shift. However, for an inferior good, that is, when the income elasticity of demand is negative, a higher level of income would cause the demand curve for that good to shift to the left. Again, how much it shifts depends on how large the (negative) income elasticity is.

## Cross-price elasticity of demand

A change in the price of one good can shift the quantity demanded for another good. If the two goods are complements, like bread and peanut butter, then a drop in the price of one good will lead to an increase in the quantity demanded of the other good. However, if the two goods are substitutes, like plane tickets and train tickets, then a drop in the price of one good will cause people to substitute toward that good, and to reduce consumption of the other good. Cheaper plane tickets lead to fewer train tickets, and vice versa.

The cross-price elasticity of demand    puts some meat on the bones of these ideas. The term “cross-price” refers to the idea that the price of one good is affecting the quantity demanded of a different good. Specifically, the cross-price elasticity of demand is the percentage change in the quantity of good A that is demanded as a result of a percentage change in the price of good B.

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Elasticity is a central concept in economic , and is applied in many situations. Elasticity can provide important information about the strength or weakness of such relationship. Elasticity refers to the responsiveness of one economic variable such as quantity demanded, to change in another variable
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such as price. #Price elasticity of demand:which measure the responsiveness of the quantity demanded to a change in price. #cross elasticity of demand:which measure the responsiveness of quantity demanded of one good to a change in the price of another good.
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