We know that a change in people’s income is going to affect demand, right? So it’s going to affect demand for goods and services, going to affect demand for cars and so on but the question is, is it going to increase demand or is it going to decrease demand? The answer to that question depends on the good in question, is the good a normal good, or is it an inferior good?
Most Goods are considered to be normal Goods and what we mean by normal Goods is that if people’s income increases then people are going to demand more of that good. There’s going to be an increase in demand. So let’s take sports cars for example if people’s incomes increase then there’s going to be an increase in demand for sports cars, so we can think of that as something that is a normal good. Now if something happens like a recession or something and there’s a decrease in people’s incomes then that’s going to decrease demand for sports cars. You might be saying “Oh okay easy, people’s income goes up demand goes up” but it depends because if it’s an inferior good then we have actually the opposite effect.
With an inferior good if people have an increase in their income they’re actually going to demand less of the good they’re going to start buying something else. Now if there’s a decrease in their income like a recession or they lose their job or something they actually increase demand for that good. So it seems kind of weird but it’s basically the inferior good that behaves in the opposite way of the normal good.
I want to give you a couple examples so let’s take the demand for chocolate bars and then let’s take the demand for potatoes and instead of potatoes you could think of something like ramen noodles if you know what ramen noodles are something that some kind of cheap good that people buy because it’s inexpensive and so we’re going to say that potatoes or ramen noodles. Well think about that as our inferior good and then the chocolate bars will consider to be a normal good and so what does that mean? That means that if we’ve got our demand for chocolate bars and people’s incomes increase.
Let’s say that people’s income people’s incomes double or something. Let’s say people’s incomes increase dramatically and we want to know the effect on demand for chocolate bars and potatoes. Well because we know that chocolate bars are a normal good an increase in people’s incomes is actually going to increase demand. So when demand increases remember that the demand curve is going to shift to the right. So we’re going to have a new demand curve D2. People are going to buy more chocolate bars their incomes doubled and they say “Hey, you know what now I could buy a lot more chocolate, I really like chocolate bars.
Now let’s think of the same thing a doubling of people’s income or triples something happens somebody got a raise at work people are doing a lot better. Now let’s think about the demand for potatoes or if you want to think about it the demand for ramen noodles or something cheap, the idea is something that is very inexpensive and that people would like to buy. So when the people’s incomes increase they say “Okay, you know what I’m tired of buying ramen noodles, I’ve had enough of that, I want to buy some chocolate bars or I want to buy some steak or something.” They want to buy something that they think is a lot better taste or something like that. They don’t want the ramen noodles anymore just because it’s cheap, because now their income is increased. So what’s going to happen is their demand is going to decrease for these long long noodles or potatoes or whatever this inexpensive item is.
We’ll say D2. So demand has actually decreased. What we notice is for a normal good when people’s incomes increase the demand is actually it’s going to shift to the right because demand is going to increase they’re going to demand more of it. However, when it’s some kind of good that people see is they don’t really want to be consuming it they’re only consuming it because it’s cheap and they don’t have a lot of money or something like that then when their incomes increase they say “You know, I don’t have to buy ramen noodles anymore, I could buy something else.” and so the demand is actually going to shift to the left.