Effect of change in Consumer’s Income on the demand of the normal and inferior goods

Learning Contents:

·            Effect of Income change on the Demand For Normal goods.

·            Effect of Income change on the Demand For Inferior goods.

Introduction

The demand for a good is related to the income of the consumer. Usually, a consumer purchases more of a good when his income rises. But there are some exceptions where a consumer buys less or no goods even if his income rises because it depends on what kind of goods is he willing to buy?  This effect of change in consumer’s income on the demand for various goods can be studied in the following situations:

1. Normal goods

2. Inferior goods

1. Normal Goods

Most of the goods that consumer purchases are normal (superior) goods. Some examples are television, smartphones, air conditioners, etc. Their demand is positively related to the income of the consumer. As income rises, the demand for normal goods also rises. If income falls, their demand also decreases. We can say that the income effect is positive in the case of normal goods. Therefore, an increased income would influence the consumer to purchase more of such goods.

1.1 Effect of Increase in Income on the demand of normal goods

As studied above, if income increases, the demand for normal goods also increases even when its price is constant. Accordingly, the demand curve shifts forward to the right. Figure 1.1 illustrates the situation showing that D₁ is the initial demand curve and OC₁ is the initial quantity demand for normal good (say, TV) at OP₁ price. Now, suppose the price is constant but with an increased income, the demand for TV will increase from OC₁ to OC₂ . Hence, the demand curve will shift to the right from D₁ to D₂. This forward shifting of the demand curve is called an increase in demand.

1.2 Effect of Decrease in Income on the demand of normal goods

Now if the income falls, the demand for normal goods would also fall even when its price is constant. Accordingly, the demand curve shifts backward to the left. Figure 1.2 illustrates the situation showing that D₁ is the initial demand curve and OC₁ is the initial quantity demand for normal good (say, TV) at OP₁ price. Now, suppose the price is constant but with decreased income of the consumer, the demand for TV will decrease from OC₁ to OC₂ . Hence, the demand curve will shift to the left from D₁ to D₂. This backward shifting of the demand curve is called a decrease in demand.

2. Inferior Goods

Inferior goods are goods of low quality such as cheap cereals, grains, etc. These are the goods whose demand is negatively related to the income of the consumer. As the income rises, the demand for inferior goods falls. If income falls, their demand increases. We can say that the income effect is negative in the case of inferior goods. Therefore, an increased income would influence the consumer to purchase less of such goods.

2.1 Effect of Increase in Income on the demand of inferior goods

Now if the income rises, the demand for inferior goods falls as consumer prefers to buy superior goods instead of inferior goods with his increased income even when their price is constant. Accordingly, the demand curve shifts backward to the left. Figure 2.1 illustrates the situation showing that D₁ is the initial demand curve and OC₁ is the initial quantity demand for inferior goods (say, beans) at OP₁ price. Now, suppose the price is constant but with increased income of the consumer, the demand for beans will fall from OC₁ to OC₂ . Hence, the demand curve will shift to the left from D₁ to D₂. This backward shifting of the demand curve is called a decrease in demand.

2.2        Effect of Decrease in Income on the demand of inferior goods

Now if the income falls, the demand for inferior goods increases as a consumer is forced to buy inferior goods instead of superior ones even when their price is constant. Accordingly, the demand curve shifts forward to the right. Figure 2.2 illustrates the situation showing that D₁ is the initial demand curve and OC₁ is the initial quantity demand for inferior goods (say, beans) at OP₁ price. Now, suppose the price is constant but with decreased income of the consumer, the demand for beans will increase from OC₁ to OC₂ . Hence, the demand curve will shift to the right from D₁ to D₂. This forward shifting of the demand curve is called an increase in demand.

We summarize this by saying that income has a positive relationship with the demand for normal goods whereas it has a negative relationship with the demand for inferior goods. 

Multiple Choice Quiz

1. If a good is an inferior good, then purchases of that good will decrease when

a. income rises

b. price of a substitute rises

c. population rises

d. demand increases

2. Normal goods are those whose income effect is

a. negative

b. positive

c. zero

d. none of these

3. Inferior goods are those whose income effect is

a. negative

b. positive

c. zero

d. none of these 

4. The demand curve for normal good shifts leftward if income ________.

a. falls

b. rises

c. zero

d. none of these

5. Normal goods are those for which demand decreases as

a. the price of a substitute falls

b. the price of a complement falls

c. the good's own price rises

d. income decreases

6. Inferior goods are those for which demand increases as

a. income decreases.

b. income increases.

c. the price of a substitute rises.

d. the price of a substitute falls

7. A fall in income of the consumer (in case of normal goods) will cause:

a. upward movement on the demand curve

b. downward movement on the demand curve

c. rightward shift of the demand curve

d. leftward shift of the demand curve

8. As a result of rise in consumer’s income, demand curve for coarse grain (inferior good)

a. becomes a horizontal straight line

b. becomes a vertical straight line

c. shifts to the right

d. shifts to the left

 

Answer Key:

 

1.a	2.b	3.a	4.a
5.d	6.a	7.d	8.d

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