explain the effect of decrease in income on demand of an inferior good. use diagram
Answers
In economics, the demand for inferior goods decreases as income increases or the economy improves. When this happens, consumers will be more willing to spend on more costly substitutes. Some of the reasons behind this shift may include quality or a change to a consumer's socio-economic status.
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Answer:
Consumer demand and income
Consumer income (Y) is a key determinant of consumer demand (Qd). The relationship between income and demand can be both direct and inverse.
Normal goods :
→ In the case of normal goods, income and demand are directly related, meaning that an increase in income will cause demand to rise and a decrease in income causes demand to fall.
→ For example, for most people, consumer durables, technology products and leisure services are normal goods.
Inferior goods :
→ In the case of inferior goods income and demand are inversely related, which means that an increase in income leads to a decrease in demand and a decrease in income leads to an increase in demand.
→ For example, necessities like bread and rice are often inferior goods.
Engel curves :
→ Engel Curves, named after 19th Century German statistician Ernst Engel, illustrate the relationship between consumer demand and household income.
→ Engel curves for normal goods slope upwards – the flatter the slope the more luxurious the good, and the greater the income elasticity. In contrast, Engel curves for inferior goods have a negative slope.
