Question

Jerry, a comedian, started out doing stand-up comedy and went on to perform on a popular hit television series. As he went from stand-up comedian to TV star, his income increased substantially. During this time, he bought more cars (specifically, Porsches) to add to his collection. For Jerry, what kind of good are Porsches?

Short answer

For Jerry, Porsches are Normal Goods.

Step-by-step solution

Definition of Normal Goods

In economic terms, normal goods are goods for which the demand increases along with increase in consumer's income, given that the prices of goods remain constant. This means, if an individual's income increases over time, they will buy more of these goods.

Apply concept to the problem

Jerry started earning more due to his success in the TV series and he began buying more Porsches. This shows a positive relationship between Jerry's income and his purchase of Porsches as he seems to buy more Porsches as his income increases.

Conclude the type of good Porsches are

Since the purchase of Porsches increases with Jerry's rise in income, according to the definition of normal goods, Porsches can be classified as normal goods for Jerry.

Key concepts

Income Elasticity of Demand

Understanding the concept of income elasticity of demand is crucial when evaluating consumer reactions to changes in their income. This measure indicates how the quantity demanded of a good or service responds to a change in income. Mathematically, it is defined as the percentage change in demand divided by the percentage change in income, or: \[\begin{equation}Income\text{ }Elasticity\text{ }of\text{ }Demand\text{ }=\text{ }\frac{\%\text{ }Change\text{ }in\text{ }Quantity\text{ }Demanded}{\%\text{ }Change\text{ }in\text{ }Income}\end{equation}\]If the quantity demanded for a good increases significantly with an increase in income, the good has a high income elasticity, and vice versa. For example, luxury goods often exhibit high income elasticity because as people become wealthier, they tend to purchase more luxury items. This phenomenon is observed in the exercise where Jerry bought more Porsches as his income grew. This behavior suggests that for Jerry, Porsches have a positive income elasticity, indicating they are likely considered luxury items in his context.

Consumer Behavior

Consumer behavior examines the decision-making processes individuals use when purchasing goods and services. Factors influencing consumer behavior include income, tastes, and preferences, as well as societal trends and marketing efforts. When Jerry's income increased, his behavior reflected his new financial status. This change in consumption pattern is a common consumer behavior when individuals shift from one economic status to another. Generally, people buy more normal goods and upscale their lifestyle when their income rises. Jerry's case is an illustration of this behavior, as he not only bought more cars but chose Porsches, indicating a preference for a particular brand and the desire for luxury or status associated with that brand. This illuminates the important aspect that consumer behavior is interconnected with personal identity and social status.

Good Classification

Goods can be classified based on how their demand changes with income fluctuations: normal goods, inferior goods, and luxury goods.

• Normal Goods: As seen with Porsches for Jerry, normal goods are those for which demand increases as the consumer's income increases. They are the typical goods most consumers tend to spend on as they become wealthier.
• Inferior Goods: These are goods for which demand decreases as income increases. In other words, they are often replaced by more costly alternatives as people can afford better options. Examples can include instant noodles or used clothing.
• Luxury Goods: These are a subset of normal goods, which not only see an increase in demand as income rises but often have a much higher income elasticity of demand. Consumers purchase them for reasons beyond basic function, such as status, brand recognition, or quality.

From the exercise, we infer that Porsches, for Jerry, are not only normal goods but could also be considered luxury goods due to the nature of the good and the extent to which his demand for them increases with rising income.