Question

Consider the consumer only consumes two goods namely flour and potatoes. Potatoes are an
inferior good Do you think that flour can also be inferior goods? Give your reviews. If the price
of flour falls, illustrate the impact on the consumption of flour and potatoes using substitution
effect and income effect.
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Answer 1

Answer:

A sub-par great is a sort of good whose request decreases when pay rises. As it were, request of substandard products is contrarily identified with the salary of the buyer.  

• For Example, there are two products in the economy - wheat flour and jowar flour - and customers are expending both. By and by the two products face a descending slanting diagram,

• For example the higher the value the lesser will be the interest and the other way around. On the off chance that the salary of buyer rises, at that point he would be increasingly disposed towards wheat flour, which is somewhat exorbitant than jowar flour.  

• The attitude of the purchaser behind this conduct is that now he can bear the cost of wheat flour as a result of his expansion in pay.

• In this way, he will switch his flour request from jowar to wheat.

• Consequently jowar, whose request has fallen because of an expansion in salary, is the substandard acceptable and wheat is the ordinary acceptable.  

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Answer 2

The "substitution effect" is the decrease in  product sale which is attributed to consumers switching to "cheaper alternatives" when its price increases. The "income effect" is the change in demand for a good/service caused by a "change in a consumer's purchasing power" resulting from a change in "real income".

Explanation:

• The consumer here is said to consume only 2 goods implying that there are only 2 goods which are consumed that is, potatoes & flour. Potatoes here is stated as inferior goods. Inferior goods are goods whose "demand decreases" when "consumer's income increases", & "demand increases" when "consumer income decreases", unlike normal goods, where the  the "opposite is observed". Normal goods are those goods for which the demand rises as consumer income rises. However, it is not given if flour is a inferior good or not. Presuming flour is not a an inferior good, then we can assume consumers consume more potatoes than flour, since the price of flour is on the higher side when compared to potatoes (substitution effect).
• Based on this, presently both commodities face a "downward sloping graph", i.e. the "higher the price" the "lesser will be the demand"  &  vice versa (substitution effect where consumer shifts to potatoes since the price of four is on the higher side when compared to potatoes). If the price of flour decreases the consumers increase his/her consumption of flour.
• If price of flour decreases , without change in consumer's income, consumer's would demand more flour as the purchasing power of consumer is increased due to decrease in price of flour. The income effect states that after the "price decline", the consumer will purchase the "same goods" as before, & still have money "left over" to buy more. Hence, a decrease in price causes an increase in quantity demanded. So, based on it, we can say that flour is a "normal good"
• However, if he price of flour remains the same and consumer's income increases, then consumers shift from potatoes to flour.The "mindset "of the consumer behind this behaviour is that now he/she could afford flour owing to income increase. Therefore, the consumer would switch his/her demand from potatoes to flour. Hence, potatoes, whose demand has "fallen" because of income increase, is the inferior good & flour is the "normal good" .

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