Question

The market demand for a good will decrease (LO1,2) a) as income decreases if the good is an inferior good b) if the market price of a substitute good increases c) as income decreases if the good is a normal good d) if the market price of a complementary good decreases e) as the number of consumers in the market increases

Short answer

The market demand for a good will decrease in case (c) as income decreases if the good is a normal good. In this case, the demand for the good is directly related to the income level of the consumers, so as income decreases, the demand for the normal good will also decrease.

Step-by-step solution

Case (a) - Inferior Good and Decreased Income

For an inferior good, the demand for the good is inversely related to the income level of the consumers. So, as income decreases, the demand for the inferior good will increase. Therefore, the given statement is false, as the market demand for the good will not decrease, but rather increase if the good is an inferior good and income decreases.

Case (b) - Increase in Price of Substitute Good

If the market price of a substitute good increases, the consumers will shift their demand to the original good as it becomes relatively cheaper. As a result, the demand for the original good will increase. Hence, in this case, the given statement is false, as the market demand for the good will not decrease but increase.

Case (c) - Normal Good and Decreased Income

For a normal good, the demand for the good is directly related to the income level of the consumers. So, as income decreases, the demand for the normal good will also decrease. Therefore, the given statement is true, as the market demand for the good will decrease if the good is a normal good and income decreases.

Case (d) - Decrease in Price of Complementary Good

If the market price of a complementary good decreases, consumers are likely to consume more of the complementary good. As a result, the demand for the original good will increase since the two goods are consumed together. Hence, the given statement is false, as the market demand for the original good will not decrease, but rather increase.

Case (e) - Increase in Number of Consumers

If the number of consumers in the market increases, the overall demand for the good is likely to increase, assuming the preferences and income of the new consumers are similar to those of the existing consumers. Therefore, the given statement is false, as the market demand for the good will not decrease but increase. In summary, only case (c) results in a decrease in market demand for a good under the given circumstances.

Key concepts

Inferior Goods

Inferior goods are interesting because they behave differently from what you might expect. Usually, as people's incomes go up, they buy more of a product. But with inferior goods, it's the opposite. As people's incomes decrease, the demand for these goods increases. Why? Because as income tightens, consumers may opt for more budget-friendly alternatives, which are usually classified as inferior goods. Examples of these might include generic food brands or used cars. It boils down to necessity and affordability driving consumer choices.
Ultimately, consumers turn to these goods because they're stretching their dollar further, showing a unique dynamic in consumer behavior.

Substitute Goods

Substitute goods play a vital role in consumer decision-making. These are goods that consumers perceive as similar or comparable, so they can be used in place of one another. Imagine if the price of coffee rises significantly; consumers might switch to tea if they consider it a substitute. This change affects the market demand as consumers shift their preference to the substitute good, usually less expensive or more available at that time.
Understanding substitute goods helps businesses anticipate shifts in demand when market prices change, allowing strategic adjustments in marketing and production.

Normal Goods

Normal goods are the standard in consumer markets, and they have a straightforward relationship with income. As incomes increase, so does the demand for normal goods. These are the goods people buy more of as they earn more—like new cars or luxury items. This is because higher income often increases a consumer's purchasing power, leading to an enhanced ability to afford more high-quality, desired items.
For normal goods, declining income can reduce demand, leading to businesses having to strategize differently, adjusting to changes in consumer purchasing power.

Complementary Goods

Complementary goods provide an excellent example of how interconnected product markets can be. These are items typically used together, like smartphones and apps, or peanut butter and jelly. When the price of one complementary good decreases, consumers might purchase more of it, and as a result, they increase their demand for the related good. This linkage showcases how pricing changes can ripple through connected markets, influencing overall consumption patterns.
The relationship between complementary goods highlights the need for businesses to consider wider market impacts when pricing and marketing their products.

Consumer Behavior

Consumer behavior revolves around understanding how people make purchasing decisions. This includes how they respond to price changes, their preferences, and how their income affects their buying choices. Each consumer can react differently based on personal habits, trends, and financial situations.
A key aspect of consumer behavior is elasticity, or how sensitive the quantity demanded is to price changes. For businesses, understanding consumer behavior is crucial for forecasting sales trends, setting optimal pricing, and tailoring marketing campaigns to better meet consumer needs and preferences.