A comparison of normal good and inferior good

Conversely, demand for inferior goods increases when income falls or the economy contracts. It is important to note that the term inferior does not necessarily relate to the quality of the good.

A comparison of normal good and inferior good

We saw that a fall in the price of good X, given the price of Y, increases its demand. This is the price effect which has dual effects: The substitution effect relates to the increase in the quantity demanded of X when its price falls while keeping the real income of the consumer constant.

The consumer substitutes the cheaper good X for the relatively dearer good Y. The income effect is the increase in the quantity demanded of X when the real income of the consumer increases as a result of fall in the price of X while the price of Y is held constant.

There are two methods of separating these two effects from the price effect, the Hicksian method and the Slut-sky method which are explained below. Hicks has separated the substitution effect and the income effect from the price effect through compensating variation in income by changing the relative price of a good while keeping the real income of the consumer constant.

Suppose initially the consumer is in equilibrium at point R on the budget line PQ where the indifference curve I1 is tangent to it at point R in Figure Let the price of good X fall.

As a A comparison of normal good and inferior good, his budget line rotates outward to PQ1 where the consumer is in equilibrium at point T on the higher indifference curve I2.

It may be noted that when there is a fall or rise in the price of good X, the substitution effect always leads to an increase or decrease in its quantity demanded.

Thus the relation between price and quantity demanded being inverse, the substitution effect of a price change is always negative, real income being held constant. This is known as the Slut-sky Theorem, named after Slut-sky who first stated it in relation to the Law of Demand.

A comparison of normal good and inferior good

To isolate the income effect from the price effect, return the income which was taken away from the consumer so that he goes back to the budget line PQ1 and is again in equilibrium at point T on the curve I2.

The movement from point H on the lower indifference curve I1 to point T on the high indifference curve I2 is the income effect of the fall in the price of good X.

By the method of compensating variation in income, the real income of the consumer has increased as a result of the fall in the price of X. The consumer purchases more of this cheaper good X thus moving on the horizontal axis from D to E.

This is the income effect of the fall in the price of a normal good X The income effect with respect to the price change for a normal good is negative. In the above case, the fall in the price of good X has increased the quantity demanded by DE via the increase in the real income of the consumer.

Thus the negative income effect DE of the fall in the price of good X strengthens the negative substitution effect BD for the normal good so that the total price effect BE is also negative, that is, a fall in the price of good X has led, on both counts, to the increase in its quantity demanded by BE.

This can be written in the form of the Slut-sky equation thus: Substitution and Income Effects for an Inferior Good: If X is an inferior good, the income effect of a fall in the price of X will be positive because as the real income of the consumer increases, less quantity of X will be demanded.

BREAKING DOWN 'Normal Good'

This is so because price and quantity demanded move in the same direction On the other hand, the negative substitution effect will increase the quantity demanded of X. The negative substitution effect is stronger than the positive income effect in the case of inferior goods so that the total price effect is negative.

A comparison of normal good and inferior good

It means that when the price of the inferior good falls, the consumer purchases more of it due to compensating variation in income. The case of X as an inferior good is illustrated Figure Initially, the consumer is in equilibrium at point R where the budget line PQ is tangent to the curve I1.

By compensating variation in income, he is in equilibrium at point H on the new budget line MN along the original curve I1. To isolate the income effect, return the increased real income to the consumer which was taken from him so that he is again at point T of the tangency of PQ; line and the curve l2.

This income effect is positive because the fall in the price of the inferior good X leads, via compensating variation in income, to the decrease in its quantity demanded by DE. When the relation between price and quantity demanded is direct via compensating variation in income, the income effect is always positive.

In the case of an inferior good, the negative substitution effect is greater than the positive income effect so that the total price effect is negative. In other words, the overall price move from R to T which comprises both the income and substitution effects has led to the increase in the quantity demanded by BE after the fall in the price of X.

This establishes the downward sloping demand curve even in the case of an inferior good.Normal goods are a complete opposite of inferior goods, as in when the prices are low people switch to normal goods but when there is a price rise, they prefer inferior goods to normal goods.

A normal good is basically the preferred good and an inferior good is the good you pick due to lack of income. 9.

Difference Between Giffen Goods and Inferior Goods (with Comparison Chart) - Key Differences

Consumers' income declines and, as a result, the demand for margarine increases%(4). The Substitution and Income Affects from the Price Effect (Inferior and Giffen Goods)! We saw that a fall in the price of good X, given the price of Y, increases its demand.

This is the price effect which has dual effects: a substitution effect and an income effect. The substitution effect relates. A normal good acts just the opposite of an inferior good; demand increases when income increases.

Normal goods may be nice shoes or name-brand clothing.

What is an 'Inferior Good'

Normal goods may be nice shoes or . Jan 25,  · A normal good is defined as a good for which demand increases when income increases, and for which demand falls when income falls.

On the other hand, an inferior good is a good for which demand falls when income increases, and for which demand increases when income falls.

Sep 09,  · This movie goes over how depending on the type of good (inferior vs normal), a change in income could have different .

Normal and inferior goods (video) | Demand | Khan Academy