The following points highlight the two major types of elasticity. The two types are: A. Income Elasticity B. Cross-Elasticity of Demand.

A. Income Elasticity of Demand:

Income elasticity of demand is the degree to which the demand for a commodity responds to a change in income.

The coefficient of income elasticity may be measured by using the following formula:

ey = Proportionate change in quantity demanded/Proportionate change in income.

Price elasticity of demand is always negative. Income elasticity, however, may be positive or negative. For most goods it will be positive, i.e., if income rises, demand for the commodity also rises, whereas, if income falls, demand for the commodity falls.

But, for inferior goods, income elasticity will be negative, i.e., if income rises, demand for an inferior good will fall, whereas, if income falls, demand for an inferior good will rise. Thus with a product like margarine, if income rises, people might now be able to afford butter instead and the demand for margarine will fall.

The boundary between positive and negative, income elasticity is zero income elasticity, corresponding to the case where a change in income leaves quantity demanded unchanged. Fig. 3.17 shows the relationship between income and quantity demanded for the three types of goods i.e., A, B and C.

B. Cross-Elasticity of Demand:

Cross-elasticity of demand is the degree to which the demand for one commodity res­ponds to a change in the price of another commodity.

The formula for measuring the coefficient of cross elasticity of demand is:

ec = Proportionate change in demand for A/Proportionate change in price of B

Cross elasticity may be positive or negative, depending on the relationship between the two commodities. If the commodities are substitutes, cross elasticity will be positive, i.e., a rise in the price of the first commodity will cause an increase in the demand for the other commodity. For example, a 5 per cent rise in the price of tea might result in a 6 per cent increase in the demand for coffee, in which case cross elasticity is (6/100) (5/100) = 1.2.