Question

What would happen to the market demand curve for polyester suits, an inferior good, if consumers' incomes rose?

Short answer

As consumers' incomes rise, the demand for polyester suits being an inferior good will decline. This will cause the market demand curve for polyester suits to shift to the left.

Step-by-step solution

Understanding Market Demand Curve and Inferior Goods

Firstly, understand what a market demand curve is. It represents the quantity of a good that consumers are willing and able to buy at various prices. An inferior good is a type of good whose demand decreases when consumers' incomes increase.

Effect of Rising Income on Inferior Goods

Realize that when incomes rise, consumers have more purchasing power. If a good is considered inferior, people will buy less of it as their income increases, substituting it with 'higher quality' or 'superior' goods. The exact opposite happens when income decreases; people tend to buy more inferior goods as they attempt to make their income go further by purchasing cheaper alternatives.

Impact on the Market Demand Curve

Relate the increased income effect on the consumption of an inferior good to changes in the market demand curve. As incomes rise and consumers purchase less of an inferior good, such as polyester suits, this reflects a decrease in market demand. The market demand curve, as a result, will shift to the left, representing reduced quantity demanded at various price levels.

Key concepts

Inferior Goods

An understanding of what constitutes an 'inferior good' is fundamental in analyzing consumer behavior and market dynamics. Inferior goods, contrary to what the name might imply, are not necessarily of low quality; rather, they are defined by the way consumption of these goods varies with income. As a person's income increases, they tend to purchase less of these inferior goods, choosing instead to buy more 'normal' goods or 'luxury' goods which they perceive as better or more desirable.

Simplifying this concept, imagine a student who frequently consumes instant noodles while studying through college because of a tight budget. As their financial situation improves post-graduation, they opt instead for fresh or organic meals over the instant variety. Here, instant noodles are the ‘inferior good’ being replaced by ‘superior’ meal options as income increases. A critical point to remember is that the label 'inferior' is purely about economic behavior, not the inherent quality of the product.

Income Effect

The 'income effect' describes how the change in a consumer's income affects their purchasing decisions. It is a vital component within consumer theory that helps us understand how variations in income influence the quantity demanded of various goods. To illustrate, when a person gets a pay raise, their purchasing power increases, leading to changes in their shopping habits. They may start buying more of some goods and less of others.

For 'normal goods', which are goods that consumers demand more of as their income rises, the income effect leads to an increase in demand. Conversely, for inferior goods, the income effect explains a decrease in demand as income grows. This change in demand is not because the good becomes more expensive but because consumers' heightened purchasing power allows them to substitute these goods with those they consider better or that were previously out of their reach financially.

Shifts in Demand Curve

The market demand curve represents the various quantities of a product that consumers are willing to purchase at different price levels, holding other factors constant. However, 'shifts in demand curve' occur when there is a change in any of the other factors, excluding price, that affects overall demand for a product. These factors include consumer preferences, income levels, prices of related goods, and expectations of future prices, among others.

When we discuss a leftward shift in the demand curve, as observed with the consumption of an inferior good like polyester suits when income rises, this indicates a decrease in demand at every price point. It's a graphic representation of the marketplace adjusting to new circumstances – in this scenario, a collective move by consumers away from polyester suits due to increased income. A rightward shift, in contrast, would signify an increase in demand. Understanding these shifts is pivotal for businesses, economists, and policymakers alike to interpret market trends and project future market behaviors.