Question

Suppose films are normal goods but transport is an inferior good. How do the quantities demanded for the two goods change when income increases?

Short answer

Demand for films increases and demand for transport decreases with higher income.

Step-by-step solution

Understanding Normal and Inferior Goods

Normal goods are those goods for which demand increases as consumer income increases. In contrast, inferior goods are those for which demand decreases as consumer income increases. This fundamental concept is essential to addressing the exercise.

Analyze the Effect on Normal Goods

Since films are classified as normal goods, when consumer income increases, the quantity demanded for films will also increase. Consumers allocate more of their income towards purchasing movies as their ability to afford them improves.

Analyze the Effect on Inferior Goods

Transport, in this case, is considered an inferior good. Therefore, as consumer income increases, the quantity demanded for transport will decrease. Consumers may choose alternatives, such as driving their car instead of using public transport, reducing their demand for the inferior good.

Key concepts

Understanding Normal Goods

Normal goods are products or services that see an increase in demand when a consumer's income rises. This trend occurs because as people have more disposable income, they tend to spend more on goods that improve their lifestyle or bring greater satisfaction.
For example, when an individual's salary increases, they might shift towards eating out more frequently, choosing premium brands, or investing in quality entertainment such as films or streaming services.
In this context, films were identified as a normal good. This means when there is an upswing in income, individuals will likely purchase more film tickets or engage more frequently with such forms of entertainment.

• Normal goods often include luxury items or non-essential luxury services.
• They usually have higher price elasticity, as people buy more when they can afford it.
• The increased demand correlates directly with increased income.

Recognizing a good as normal helps understand consumer behavior and predict market trends when an economy observes an income change.

Explaining Inferior Goods

Inferior goods have an inverse relationship with income changes when compared to normal goods. When income increases, the demand for inferior goods typically decreases.
This happens because consumers opt for more convenient, better-quality alternatives when they have more money to spend. In the exercise, transport, specifically expected to be public transport or low-cost options, is classified as an inferior good.
For instance, a person using public transit may switch to a personal car once their income allows, reducing their frequency of using the inferior transport option.

• Inferior goods are not necessarily of low quality, but rather associated with cheaper, budget-friendly choices.
• They often meet basic needs more affordably and are replaced when financial situations improve.
• Typical examples include instant noodles compared to dining at a restaurant or smaller apartments versus larger homes.

Understanding which goods are considered inferior can provide insights into consumer trends and preferences when incomes fluctuate.

The Income Effect

The income effect refers to the change in the quantity of a good demanded resulting from a change in a consumer's purchasing power. This effect varies significantly between normal and inferior goods, making it a key concept in consumer behavior analysis.
For normal goods, the income effect leads to increased demand, as individuals feel wealthier and capable of spending more on high-quality goods. This was seen in the exercise with the increased demand for films.
Conversely, with inferior goods, the income effect can result in decreased demand. As consumers feel richer, they may decide to upgrade or substitute inferior goods with superior alternatives. This change in demand was shown with transportation in the exercise when higher income leads to fewer people using less expensive alternatives.

• The income effect helps in understanding how consumers adjust their expenditures based on their income variations.
• It highlights both direct and indirect impacts on a consumer's choice pattern in economic terms.
• It greatly contributes to the analysis of market supply and demand dynamics.

Overall, acknowledging the income effect aids in predicting economic trends and consumer choices more precisely.