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PART A: THE BUSINESS ORGANISATION, ITS STAKEHOLDERS AND THE EXTERNAL ENVIRONMENT 
 
98
 
Price elasticity of demand 
Point method Arc method 
100
20
4
100
100
5


= 
20%
5%
= 0.25 
100
22
4
100
97
5
2
1


= 
18.2%
5.13%
= 0.28 
 
4.8 Income elasticity of demand
Income elasticity of demand 
measures the responsiveness of demand to changes in household income. 
Cross elasticity of demand 
is determined by the availability of substitute (competitors') products.
It is possible to construct other measures of elasticity than price elasticity, and an important one which 
you need to know about is 
income elasticity of demand
. The income elasticity of demand for a good 
indicates the responsiveness of demand to changes in 
household incomes
.
 
When household income rises people will not only increase their demand for existing goods but also 
start to demand new goods which they could not previously afford. 
Income elasticity of demand = 
income
in
change
%
demanded
quantity 
in
change
%
(a) 
Demand for a good is 
income elastic
 
if income elasticity is greater than 1; in other words, if 
quantity demanded rises by a larger percentage than the rise in income. For example, if the 
demand for compact discs will rise by 10% if household income rises by 7%, we would say that 
the demand for compact discs is income elastic.
(b) 
Demand for a good is 
income inelastic
 
if income elasticity is between 0 and 1, and the quantity 
demanded rises less than the proportionate increase in income. For example, if the demand for 
books rises by 6% if household income rises by 10%, we would say that the demand for books is 
income inelastic. 
The change in quantity demanded takes the form of a