Question

True or false? In a two good model if one good is an inferior good the other good must be a luxury good.

Short answer

False, the other good can be a normal good, not necessarily a luxury good.

Step-by-step solution

Define Inferior Goods

Inferior goods are those for which demand decreases as income increases, meaning that consumers purchase less of these goods when they have more money.

Define Luxury Goods

Luxury goods are goods for which demand increases more than proportionally as income increases, often categorized as 'non-essential' compared to necessities.

Relationship in a Two Good Model

In a two-good model, if one good is an inferior good, it does not necessarily mean that the other must be a luxury good. The other good could simply be a normal good, whose demand increases proportionally with income without being classified as luxurious.

Final Analysis and Conclusion

Since the definition of inferior and luxury goods does not necessitate that the counterpart of an inferior good must be a luxury good, the statement is false. The missing requirement is the exclusive link between inferior and luxury goods, which does not exist.

Key concepts

Luxury Goods

When we talk about luxury goods, think of items that people tend to buy more of when they have extra money. For example, luxury cars, designer handbags, or expensive watches. These goods are considered 'non-essential' compared to basic necessities like food and clothing.
With luxury goods, the demand rises sharply with an increase in income. If someone gets a raise, they might choose to spend the extra money on a fancy vacation or high-end electronics, which they wouldn't do if they were sticking strictly to necessities. This is because luxury goods not only fulfill basic needs but also offer added prestige or a higher quality of experience.

• Luxury goods are often more about desire than necessity.
• They indicate status and wealth.
• People usually indulge in luxury goods more when they have extra income."

Understanding luxury goods helps to distinguish them from other types of goods, especially in economic models where spending patterns are analyzed based on income changes.

Two Good Model

A two good model simplifies the analysis by examining only two goods at a time. This approach helps to see how changes in income, preferences, or prices affect the consumption of these goods. Imagine a scenario where a consumer can only choose between two items, say apples and oranges.
In this model, economists analyze how the consumption of these goods changes based on different factors. For example, if a person's income increases, will they buy more apples, more oranges, or both? The two good model helps answer these questions by focusing on just two choices, making it easier to see direct relationships without overwhelming complexity.

• The two good model simplifies real-world situations into manageable analyses.
• It emphasizes understanding the trade-offs between how much of each good is purchased.

This model is particularly useful in illustrating concepts such as inferior, normal, and luxury goods, because it highlights how income changes affect different types of goods. With this model, one can easily understand that if one good is inferior, the other does not have to be a luxury, but rather can be a normal good.

Normal Goods

Normal goods are quite intuitive. As people earn more, they buy more of these goods, but not as drastically as they do with luxury goods. Think of products like organic groceries or basic electronics that see increased sales with a rise in income.
In the realm of economics, normal goods represent those items where demand grows steadily with income. Unlike luxury goods, where demand spikes sharply with extra cash, normal goods experience a proportional increase. This means if you get a regular salary increment, you might choose to slightly upgrade your lifestyle by dining out more or choosing slightly higher-end clothing.

• With normal goods, consumption increases steadily with income.
• They strike a balance between necessities and luxury items.

So, in a two-good model, if one good is inferior – meaning people buy less when they earn more – the other good could simply be a normal good rather than a luxury one. This understanding refutes the idea that if one good is inferior, the other must be luxury, as normal goods fill the middle ground between necessities and luxuries.