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Cross Elasticity and Income elasticity (Income elasticity of demand : a…

- - - - Towards Positive infinity
        
        1) The closer the substitute or complement, the bigger the effect on the demand of the good when the price of the substitute or complement changes. 2) When 2 goods are perfect substitutes, XED tends to go towards positive infinity and negative infinity when they are perfect complements.
      - Towards 0
        
        1)When 2 goods are less closely related, there is a smaller effect on the demand of one good when the price of the substitute or complement changes. 2) When 2 goods are independent or unrelated, XED = 0.
    - - 1) Substitutes for one another. 2) A decrease in the price of one good leads to a fall in demand for the other, vice versa.
    - - 1) Complements of one another. 2) A decrease in the price of one good leads to a rise in the demand of the other and vice versa
  - - - When XED<0, complements change in price. Firms can have join promotions such as discounts
      - When XED>0 , substitutes change in price. Firms react by either employing pricing strategy to recoup revenue or employ non pricing strategy [ product differentiation] to make the demand for their good more price elastic
- - - - With an increase in income, there is no change in the demand, ceteris paribus
    - - 1) Inferior goods 2) With an increase in income, there is a decrease in demand, ceteris paribus.
    - - 0<YED<1 1) Income inelastic 2) Necessities 3) With an increase in income, there will be a less than proportionate increase in the demand, ceteris paribus.
      - YED>1 1) Income elastic 2) Luxury goods 3)With an increase in income, there is a more than proportionate increase in demand, ceteris paribus
      - YED = 1 1) Unit income elasticity 2) With an increase in income, there is a proportionate increase in the demand, ceteris paribus
  - - - The same good can be considered a luxury, normal good or a inferior good depending on the income of the consumer.
      - The YED will be higher the lower the level of income and vice versa
  - - - Changes in income level can help to project changes in tax revenue and other government policies
    - - Targeting different income groups in different locations ( niche markets) :pencil2:So that appropriate prices and quantities can be set to suit the demands of perspective income-level groups
      - Determines 1) Responses to changes in national income levels during economic boom or recession , dependent on type of good 2) For luxury goods, demand increases rapidly during an economic boom. Hence, firms may choose to increase production levels, make the product more price elastic through campaigning, stock accumulation and expansion. 3) For inferior goods, firms must do the reverse of luxury goods during economic boom.