Question

Name a good you consume for which your income elasticity of demand is negative. What happens when your income increases?

Short answer

An inferior good has negative income elasticity; as income increases, its demand decreases.

Step-by-step solution

Understanding Income Elasticity of Demand

Income elasticity of demand measures how much the quantity demanded of a good responds to a change in consumer income. Specifically, it is known as negative when an increase in income leads to a decrease in demand for a particular good.

Identifying the Type of Good

A good with a negative income elasticity of demand is known as an "inferior good." Examples include low-quality products like instant noodles or generic canned goods that people often buy less of as their income rises.

Analyzing Changes with Income Increase

When your income increases and you consume less of a good, this indicates that the good is an inferior good. As consumers' incomes rise, they tend to purchase more normal or superior goods and reduce consumption of these inferior goods.

Key concepts

Inferior Goods

Inferior goods are an intriguing category of products within the market. These are goods for which demand decreases as consumer incomes rise. This might seem counterintuitive at first. When people have more money, they actually buy less of these items. This happens because inferior goods typically belong to the lower-quality or less expensive spectrum. People usually purchase them out of necessity rather than preference.

For example, think about instant noodles or generic brands of canned goods. When you're on a budget, you might reach for these. But as you start earning more, you might choose fresher ingredients or branded products instead.

• Inferior goods have a negative income elasticity of demand.
• People switch to higher-quality alternatives when they can afford them.
• These goods serve as a basic need rather than a choice.

Consumer Income

Consumer income plays a significant role in determining what people buy. As people earn more money, their purchasing decisions often shift. Not only do they buy more, but the types of goods they buy also change.

When talking about income elasticity of demand, consumer income is the variable that causes changes in quantity demanded. For inferior goods, as the income increases, the budget constraint relaxes, encouraging a shift towards alternatives regarded as superior. People start exploring more expensive options, thus reducing the consumption of inferior goods.

• Increase in income can decrease demand for certain goods.
• Introduction of more disposable income expands consumer choice.
• Higher income can lead to diversification in purchasing behavior.

Quantity Demanded

Quantity demanded refers to the total amount of a product that consumers wish to purchase at a given price level. This concept plays a key part in understanding consumer behavior, especially when factoring in changes in income.

For inferior goods, as income rises, the quantity demanded usually falls. This is a classic illustration of the negative income elasticity concept. Simply put, more money in the consumer's pocket means they desire less of the basics provided by inferior goods. Instead, they look for alternatives that offer more satisfaction or status.

• Quantity demanded reacts inversely with income for inferior goods.
• Demonstrates the consumer's preference shifts as financial capacity grows.
• Essential in analyzing market trends and consumer behavior.

Normal Goods

Normal goods are the opposite of inferior goods. As consumer income increases, the demand for normal goods also rises. These are items most people prefer to buy more of when they have higher income. Their demand directly corresponds with consumer financial well-being.

Products like fresh produce, branded clothing, or electronics often fall into this category. With more purchasing power, consumers lean towards goods that provide greater satisfaction, quality, or prestige compared to their image of inferiors.

• Normal goods showcase a positive income elasticity of demand.
• Positive relationship between income growth and demand.
• Indicative of consumer preferences for quality and enhanced experiences.