Friday, May 23, 2008

Econ 101: A Note on The Law of Demand and Inferior Goods

A couple of quick notes about some basic principles of economics.

The first is the law of demand which states that, for most goods, when prices rise, the quantity demanded goes down. Sometime this is relationship is very extreme (very elastic), especially when there are many good substitutes and when the good is not a particularly big part of your well-being. Sometimes this relationship is very small (very inelastic), especially when there are few good substitutes and when the good is central to well-being. Take gasoline for example, not many good substitutes to put in your car and one's car is often central to one's well-being. But the law still holds and raise the price high enough and the effects will become more and more visible.

The second is the fact that there are normal and inferior goods in the world. A normal good is one whose demand rises when income rises. An inferior good in the opposite. This also means that when incomes fall, like many are experiencing now as inflation erodes the real value of their paychecks, demand for inferior goods rises and demand for normal goods falls. Well, it appears that standard picture-tube TVs are 'inferior goods' and fancy flat-screen TVs are 'normal goods' in today's world. Note that you may say, "sure, it is obvious that the picture quality is inferior, thanks for the insight Mr. Economist." But this is different, there are many things that might not be of the highest quality that still see sales go up with higher incomes, in fact most goods probably fit this description. So it is interesting, to me at least, to find real examples.


Jeff Alworth said...

Suroweicki has a piece this week talking about how low-priced goods from China ameliorate the effect of lost jobs for low-income consumers. Does this mean that the fortunes of "normal" and "inferior" goods might rise or fall depending on which group they target? Or do normal and inferior in this case always refer to categories of products (flat screens v. picture tube)?

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