IB Economics: Income & Cross Elasticity (YED, XED) FAQ

YED and XED appear in Paper 1 essays (both SL and HL), in Paper 2 data-response questions, and in Paper 3 HL calculations. You're expected to calculate the coefficient, interpret its sign and magnitude, and link it to real-world classification of goods or firm strategy.

YED equals the percentage change in quantity demanded divided by the percentage change in income: YED = (%ΔQd) / (%ΔIncome). A positive value means the good is normal; a negative value means it's inferior. The size of the number (not just its sign) tells you whether demand is income-elastic or income-inelastic.

XED equals the percentage change in quantity demanded of Good A divided by the percentage change in the price of Good B: XED = (%ΔQd of A) / (%ΔPrice of B). A positive value signals substitutes; a negative value signals complements; a value near zero means the goods are unrelated.

Check the sign first, then the size. Positive YED means normal; negative means inferior. Among normal goods, YED between 0 and 1 marks a necessity (income-inelastic), while YED above 1 marks a luxury (income-elastic). This classification is what examiners want stated explicitly, not implied.

Forgetting the sign. Students calculate the coefficient correctly, then describe substitutes/complements or normal/inferior status backwards because they dropped the negative sign during the calculation. In fifteen years of marking mock papers, this single slip costs more marks than any arithmetic error.

Use: %Δ = (New value − Original value) ÷ Original value × 100. Apply this separately to quantity demanded and to income or the other good's price, then divide the two percentages to get YED or XED. Always use the original (not new) value as the denominator unless the question specifies the midpoint method.

Not usually — YED and XED are numerical/interpretive concepts rather than diagrammatic ones, unlike PED and PES. Paper 1 essays on elasticity more often reward a clear table or worked calculation plus real-world application than a demand curve, though a demand curve shift can support an XED argument about substitutes.

PED measures responsiveness of quantity demanded to a change in that same good's own price. YED measures responsiveness to income change; XED measures responsiveness to a different good's price change. All three use the same percentage-change logic, but they answer different economic questions and lead to different real-world classifications.

Firms use YED to forecast demand through the business cycle. A firm selling luxury goods (high positive YED) expects sales to swing sharply with GDP growth or recession, while a firm selling necessities (low positive YED) expects steadier demand regardless of the economic cycle.

XED tells a firm how a rival's price change will affect its own sales. A high positive XED (strong substitutes) means a firm must react quickly to a competitor's price cut, while negative XED (complements) means a firm might benefit from a partner product getting cheaper, boosting joint demand.

Common exam contexts include inferior goods during recessions (own-brand groceries, bus travel), luxury goods in emerging economies (cars, air travel), and substitute/complement pairs like coffee and tea (XED positive) or printers and ink cartridges (XED negative). Paper 2 data-response questions often draw on real published elasticity estimates.

Practise calculations until the formula is automatic, then drill past-paper data-response questions so the interpretation (sign, magnitude, real-world meaning) becomes second nature too. Most students lose marks on interpretation, not arithmetic, so spend more revision time explaining what a number means than recalculating it.

The core YED/XED content is identical at SL and HL — the difference shows up in Paper 3, which is HL-only and demands more precise quantitative work, often combining elasticity with other calculations like consumer surplus or tax incidence in a single multi-part question.