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Course: Macroeconomics > Unit 1
Lesson 4: Demand- Law of demand
- Price of related products and demand
- Change in expected future prices and demand
- Changes in income, population, or preferences
- Normal and inferior goods
- Change in demand versus change in quantity demanded
- Lesson summary: Demand and the determinants of demand
- Demand
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Normal and inferior goods
We examine the concept of demand curves for two different products: a laptop and a cheap car. We see how changes in income can affect demand, with the laptop being a "normal good" (demand increases as income increases) and the cheap car being an "inferior good" (demand decreases as income increases). Created by Sal Khan.
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I have a slight question regarding the example Sal has used for a normal good. Please excuse me if it is blatantly obvious or if I have made a mistake. If lets say there were a more expensive and better laptop on the market wouldn't an increase in Income encourage people to buy the better laptop instead thus resulting in a decrease in the quantity demanded for the laptop in the video? If so this would imply that the laptop is an inferior good and not a normal good. Is this true?(40 votes)
If we look at the relationship in reverse one can determine what product is considered to be an inferior and a normal good according to market reaction. Its not exactly a determination that can be labeled perfectly. However, if you have a product and the demand would increase if the general population has more income you would say this is a normal good. Its just a tag given to a product that consumer prefer and would buy more of if income were to change.
An inferior good is consider a product or service that a consumer would readily dispose of or substitute if he or she had more disposable income. That is why this labeled inferior because the demand for such products seems to decrease when people have more money. Because it is seen as more disposable it is considered an inferior or less preferable option.(25 votes)
Is it possible for a good to be labeled as an "inferior good" for reasons other than product quality, such as consumer preferences (such as a consumer-body preference for "retro-styled" radios relative to radios with more modern product styling?(13 votes)- Yes, it is. "Inferior Good" is not a value judgement, it's a market judgement. And inferior good is any good that demand for increases as income decreases. Bud Light is an inferior good; as income decreases, demand for Bud Light increases.
By contrast, a fine European wine is a superior good. As income increases, demand for fine European wine increases.
This is true even if we suppose that Bud Light is actually more fun to drink than fine European wine. That isn't what is relevant. All that is relevant is income, and how income level tends to effect demand on average.(44 votes)
Am I correct in thinking that 'normal' and 'inferior' are unavoidably subjective? that it is futile to allocate such terminology to these goods? Incomes may be decreased below what is even required to purchase this car; better models of laptop may be purchased. Is all of economics susceptible to some sort of relativist, Hume-esque doubt?(9 votes)- I'd say yes; peoples views are changing all the time. Some things change less over time (like maybe food, although that is changing as well, due to the new fast paced information/marketing age). I wouldn't say it's futile though. For the purposes of your company, you'd need to describe where your product currently is (or what demographic you're targeting), but you need to remember that these things do change. So, you may have a 'normal' good at the moment, but it can become 'inferior' due to many different situations that may happen. Taking this analogy to technology, when a laptop came out in 2005 that may have been top of the line, it may even have been luxary, it was a normal good. But now that technology has increased by bounds, this products technology is now very outdated, and it is an 'inferior' good to me now. If I had less money, I may buy it because it's all I can afford (it's much cheaper), but I'd rather get one of those flashy MacBook Pro's. :) I hope that helped you out.(11 votes)
How is it possible to distinguish between normal goods and inferior goods?(5 votes)- Economic theory states that individuals are sensitive to changes in their own income (in terms of what those individuals purchase). A "normal good" is a good where, when an individual's income rises, they buy more of that good. An "inferior good" is a good where, when the individual's income rises they buy less of that good. It is important to note that all other variables are held constant (i.e. "ceteris paribus"). Also, the opposite relation is also true. For a normal good, if income falls, less of the normal good will be purchased. For an inferior good, if income falls, more of the inferior good will be purchased.
Based on theory, you can probably think of some goods that might be normal and some that might be inferior. For instance, a normal good might be a cellular phone. As an individuals' incomes increase (holding all other variables constant), you might expect that more people will purchase cellular phones. An inferior good, on the other hand, might be bus rides. For example, if an individual's income rises, that person might have adequate income to purchase a car instead of taking the bus (so you may see the quantity of bus rides fall, all other variables held constant).
However, it is important to note that the two examples that I gave (the cell phone and the bus examples) are based on guesses about how we expect the consumer to behave - in other words, I am hypothesizing that consumers will behave that way if their incomes change. An empirical economist will take those hypotheses, collect relevant data in the field and analyze that data (using mathematical and/or statistical tools) to determine whether the hypotheses can be rejected.(11 votes)
Would it not make sense to add a third category such as Superior Good? Hypothetically Superior goods as label could replace the label of Normal goods. Normal goods could be goods which remain constant regardless of Income increase/decrease.
Inc increase - Sup good demand increases
Inc increase - Normal good demand remains constant
Inc increase - Inf good demand decreases(5 votes)
But won't the laptop also become an inferior good if better laptops come in the markets?(4 votes)
Yes, that is true! We don't say "Good X is always an inferior good". Goods are inferior or normal based on the way people react.
The important thing with normal and inferior goods is to look at what the numbers tell you, rather than make assumptions about what kind of good it is. For example, some people might really love boxed macaroni and cheese and will buy more when their incomes increase. But other people might not like it at all and might only eat it because it is all they can afford.(4 votes)
fr thought it said "Normal and Inferior GODs" not goods lol(5 votes)- With an inferior good, when the quantity goes up, would the price also go up?(3 votes)
- Yes. The shape of the demand curve and response to price are the same for inferior goods as for normal goods. The difference in the two is how they respond to changes in income.(4 votes)
- In your previous video, you mentioned a change in preferences to increase or decrease the demand of goods. Wouldn't it be better to say that change in income affects the preferences of consumers which in turn affects the demand of a product?(3 votes)
- Sure, change in income does indeed affect the preferences of consumers. You typically want to just say "a change in preferences leads to a change in the demand of goods" so that it's more general, though. Sure, the change in income changes the preferences of consumers, but so do many other things: maybe a new fashion trend just came out; maybe some company had some scandalous event and people don't like them anymore; etc. Many things can change the preferences of consumers, not just a change in income, which is why we want to be general.(4 votes)
Couldn't a lob top just as easily be an inferior good because if income went up they would just buy a better or newer lab top? or am I being to technical?(1 vote)- I believe if you are talking about laptops in general, then an increase income would result in an increase of laptop purchases if you are referring to all laptops On the other hand, (metaphorically speaking) if you were to have a 1984 Yugo-style laptop, an income increase would most likely result in a decrease of demand towards the (low-end, poor performing) 1984 Yugo laptop(6 votes)
Video transcript
What I want to do in this video is think about the demand curve for two different products. So this is some laptop that's on the market. And this, let's just say, is the cheapest car that happens to be on the market this is actually a picture of a 1985 assuming this is the cheapest car on the market. So let's just think about their hypothetical demand curves right now So once again, on the vertical axis, we're going to put price, and on the horizontal axis, we put quantity, and then over here let me do it for the same thing So this is price, and this right over here is quantity. And both of them satisfy the law of demand if the price is really high the quantity demanded is going to be really low for the laptop and so it might be right over there and if the price is low the quantity demanded is going to increase. So, the demand curve might look something like that. And it doesn't have to be a curve, or doesn't have to be a line, it could be a curve or anything like that. So that is the current demand for the laptop All else equal, so we're not talking about shifting any of those other factors that we've been talking about in the last few videos. Now we can draw a similar demand curve for this very cheap automobile. If the price is high, very few people are going to want to buy it, and I'm not going to specify what the price is, but this is a general idea if the price is higher, fewer people are going to want to buy it If the price is lower, more people are going to want to buy it So this demand curve will also have the same shape from the top left to the bottom right it satisfies the law of demand. So once again, that is the current demand. Now let's think about how the demand for each of these goods might change depending on changes in income. So we're going to focus on the income factor the income effect, for this video and see how these 2 products might change. So let's just assume that income in the general population goes up. So for something like a laptop, wow, if more people are making more money especially in real terms they have more money to spend well for any given price point, at any given price point, there's going to be a higher quantity that's demanded. At any given price point, higher quantity demanded. And so if income goes up for this laptop, the demand will increase. And the way we show demand increasing is the whole curve shifts to the right so this right over here demand increased demand went up when income went up. And this makes complete sense and if income were to go down, demand would go down because people would have less money to buy something like a laptop. And this is the case for most goods we call things like this, when income goes up, demand goes up, whole curve shifts to the right income goes down, demand goes down, whole curve shifts to the left We call this a normal good. So this right over here is a normal good. Now let's think about what happens with the cheapest car on the market. And let's assume we're in a developed country where almost everyone has some form of a car. Now, what happens when income goes up? So people have more money but are they going to spend that money buying the cheapest car on the market? Well, in most cases, if income goes up generally, people say, well I have a little bit more money, maybe I'll buy a slightly nicer car. So, and maybe in particular the people who were going to buy this car at any given price point So this price point, the people who were going to buy the car will say Wait! I can now afford a better car! Why should I you know, this is not safe maybe or not as safe as the other cars, and I want to impress my friends from high school and all that, so something very strange might happen for this car, the demand for this car. It actually will decrease so the whole curve could shift to the left. So income is a very strange thing for this good because income increasing maybe people say, hey you know what, I could trade out of this good I could get a good that I'd rather have than just getting more of this thing right over here Demand went down. And goods like this, we call them inferior goods. And the general way to think about inferior goods are the goods that people will want to not own if they had more money they would want to buy, I guess, less inferior goods. Or another way to think about it is, if income were to go down, and more people are budget strapped and they can't afford the Mercedes-Benz or the BMW or even the mid-sized sedan anymore, so if income were to go down and things were getting tighter, more people would want this car more people would have to trade down to this because they're strapped, they're tightening their belts and so you'll have this strange situation where if income goes down, demand would go up for this thing So income goes down, demand goes up. Remember, we're talking about demand, we're talking about the entire shifting of the curve. At any given price point, the quantity demanded will go up. Because, this is, or we're assuming, is the cheapest car on the market. So, and likewise, if income were to go down for a normal good, it'll do what you'll expect, demand would go down. So this, an inferior good, does the opposite of a normal good when we're talking about the income effect, the inferior good will do the opposite of a normal good and that's because people want to trade out of it when their income goes up or they don't want to buy it or they want to buy something nicer. And when their income goes down, they'll say I have to buy this thing, so you know, let me just do it.