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Income Elasticity of Demand: It can be defined as the degree of responsiveness of quantitiesdemanded to a given change in income. The formula is

ey = proportionate change in quantities demandedproportionate change in incomes= (Q2-Q1)/(Q2+Q1)

(Y2-Y1)/(Y2+Y1) ;

where Q1=Quantity demanded before the change in income; Y1= Income before the changeQ2=Quantity demanded after the change in income; Y2= Income after the change

Types of income Elasticity1. Zero income elasticity: A change in income will have no effect on quantities demanded. E.g:-

Salt2. Negative Income Elasticity: An increase in income will lead to a reduction in the quantities

demanded. Such goods are inferior goods .3. Positive income elasticity: An increase in income will lead to an increase in the quantities

demanded. E.g:- superior goods .+ve income elasticity are of 3 kinds; a) unity elasticity, more than unity elasticity(e

y>1), less

than unity elasticity(ey

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in the price of another related commodity'. Thus the price of one commodity, say Z, is theindependent variable whereas the quantity of another commodity, say X, is the dependentvariable. Cross elasticity of demand can be measured by the following formula :

ep

= Proportionate change in the quantity demanded of x

Proportionate change in the price charged for z

= (Qx2-Qx1)/(Qx2+Qx1)(Pz2-Pz1)/(Pz2+Pz1)

If cross elasticity is +ve , the goods are said to be substitutes; if -ve , the goods are complements. Fortotally unrelated products, the elasticity co-efficient is 0.

The concept is used to anticipate the effect of sales of a firm to a change in price of their rivals. Fore.g., Maruti Udyog Ltd can measure the effect of a change in prices of Santro or Matiz on the demandfor Zen.

Advertisement/Promotional ElasticityThe expansion of demand by means of advertisement and other promotional efforts may be measuredby advertisement elasticity of demand, also called promotional elasticity. The promotional elasticitymeasures the responsiveness of demand to changes in advertisement or other promotional expenditure.The formula for its measurement is given below:

ea

= Proportionate change in sales

Proportionate change in advertisement expenditure

= (Q2-Q1)/(Q2+Q1)

(A2-A1)/(A2+A1)whereQ1 stands for sales at advertisement outlay A1 and Q2 stands for sales at advertisement outlay A2.

Factors Determining Advertisement Elasticity of Demand

1. Type of Commodity : Advertisement elasticity will be higher for luxuries than for necessities;also higher for new products and growing products than for old ones.

2. Market Share : The larger the firm's market share, the lower the advertisement elasticity of demand is likely to be, and vice versa.

3. Rivals' Reactions : if rivals react to increases in a firm's advertisement by increasing their ownpromotional spending including advertisement expenditure or increased sales efforts, theexpenditures will tend to cancel each other out, reducing advertisement elasticity of demand.

4. State of Economy : If economic conditions are good & households have a high discretionaryincome, they are more likely to respond to advertisement than when incomes & expendituresare more tightly constrained.