Question

Goods for which demand is directly (positively) related to income are called (LO2) a) substitute goods b) complementary goods c) inferior goods d) normal goods

Short answer

The correct answer is d) Normal goods, as their demand has a direct (positive) relationship with income.

Step-by-step solution

Understand option a: Substitute goods

Substitute goods are those goods that can be used in place of one another. When the price of one good increases, the demand for its substitute typically increases. This is not related to the income of consumers, so this is not the correct answer.

Understand option b: Complementary goods

Complementary goods are those goods that are used or consumed together. If the demand for one good increases, the demand for its complementary good will often increase as well. Again, this does not have a direct relationship with the income of consumers, so this is not the correct answer.

Understand option c: Inferior goods

Inferior goods are those goods for which demand decreases as income increases. Consumers often prefer to buy superior goods over inferior goods when their income increases. This represents an inverse (negative) relationship between demand and income, so this is not the correct answer.

Understand option d: Normal goods

Normal goods are those goods for which demand increases when income increases. When a consumer's income growth and they can afford to buy more, the demand for normal goods rises. This best fits the description given in the question, having a direct (positive) relationship between demand and income.

Choose the correct answer

Based on the analysis of each option, we can conclude that the correct answer for the type of goods with a direct (positive) relationship between demand and income is: d) Normal goods

Key concepts

Demand and Income Relationship

Understanding the relationship between demand and income is essential in economics. It revolves around the simple concept that purchasing behavior changes as people's income levels change. This concept is vital to grasp because it directly influences how various types of goods are demanded by consumers.

As income increases, typically, so does the demand for what are known as 'normal goods'. These are items that people want more of as they have more disposable income. On the flip side, some goods see a decrease in demand as income rises; these are termed 'inferior goods'. The interplay between income changes and demand shifts is a fundamental aspect of consumer choice and market dynamics.

Inferior Goods

Inferior goods have a peculiar spot in economics—they're the items that become less desirable as consumers' income rises. Think of generic-brand groceries or budget clothing brands; when people have limited resources, they opt for these cost-saving options.

However, when incomes increase, the allure of these goods diminishes, and individuals often upgrade to pricier alternatives. This negative correlation between demand and income highlights the inverse nature of their relationship, which is contrary to that of normal goods. It's interesting to note how a term like 'inferior' isn't about the quality necessarily, but about the economic reaction to income changes.

Complementary Goods

Complementary goods share a dance, where if one leads, the other follows. They are products that are often used together, such as smartphones and data plans or cookies and milk. When people buy one, they're likely to buy the other.

This interdependent relationship becomes key in understanding market strategies for businesses that offer such goods. Pricing and promotion are typically coordinated to capitalize on this connection. However, unlike substitute or normal goods, the demand for complementary goods isn't closely linked to income but rather to the demand for its counterpart.

Substitute Goods

In the world of choices, substitute goods stand as alternatives. When the price of one good increases, consumers might switch to a more affordable substitute without major loss in satisfaction. Examples are plentiful—butter and margarine, tea and coffee, or even public transport versus a personal vehicle, depending on the context.

Substitutes play an essential role in keeping markets competitive and ensuring that consumers have options. It's the basic idea that helps keep markets dynamic and prices in check. Though not directly related to income, substitutes are crucial in consumer decision-making, especially when prices fluctuate.