Question

"If a good is inferior, a rise in its price will cause people to buy more of it, thus violating the law of demand." True or false? Explain.

Short answer

The statement is untrue. While inferior goods see increased consumption as income decreases, the Law of Demand still applies. As the price of an inferior good goes up, people will still buy less of it, not more.

Step-by-step solution

Understanding the Law of Demand

The Law of Demand, in economics, is a traditional principle that states that, all else being equal, as the price of a product increases, quantity demanded falls. Conversely, as the price decreases, demand increases.

Understanding Inferior Goods

Inferior goods are a type of product whose demand decreases when consumers' income rises. Contrary to 'normal' goods, these types of goods are unique in that they have a negative income effect. When people have less money, they typically buy these goods because they can't afford the higher-quality versions (or 'normal' goods). When their income rises, they buy fewer inferior goods.

Evaluate The Statement

Based on the understanding of the above concepts, we can examine the statement. A rise in the price of an inferior good won't make people buy more of it. Instead, a rise in income might make people buy less of it. Therefore, the statement is false. The Law of Demand isn't violated, as consumers will still buy less when prices rise, whether the good is normal or inferior.

Key concepts

Inferior Goods

In economic terms, inferior goods represent a category of products for which demand decreases as the consumer's income increases. This contrasts with normal goods, which see increased demand as incomes rise.

Inferior goods are typically considered lower-quality alternatives to more expensive products, and are often purchased out of necessity rather than preference. For example, off-brand grocery items, used cars, and budget clothing can all be classified as inferior goods. When individuals experience a rise in income, they generally opt for higher-quality, more expensive items, thereby reducing the demand for inferior goods.

Income Effect

The income effect is a concept that explains how changes in consumers' income levels affect their purchasing habits, particularly concerning their demand for goods and services.

When a person's income increases, they can afford to increase their consumption of normal (superior) goods, and consequently, they tend to purchase less of inferior goods. Conversely, if their income decreases, consumers may increase their consumption of inferior goods as a substitution for more expensive products. This behavior shift reflects the inverse relationship between income levels and demand for inferior goods, a core element in understanding consumer choice dynamics.

Quantity Demanded

The term 'quantity demanded' denotes the specific amount of a product that consumers are willing and able to purchase at a given price point within a certain time period. It's a fundamental concept in the law of demand, which states there is an inverse relationship between the price of a good and the quantity demanded.

This means that as prices fall, consumers are typically inclined to buy more of the product, due to the product becoming more affordable. Conversely, when prices rise, the quantity demanded usually falls, since consumers may find the product less attractive or beyond their budget constraints. This relationship can be represented graphically by a downward-sloping demand curve.