Income vs Supply and Demand

Products whose demand rises with an increase in income are considered standard goods (Sugden, 1985). A good is considered to be normal if our demand for it has increased as our income has grown. When one’s income is low, they will choose low-quality, less costly coffee, whereas when one’s income is higher, they will choose better-quality, more expensive coffee. The consumption of coffee is influenced by people’s individual tastes, it should be emphasized. The more expensive organic food at the grocery store is another illustration of a typical item. People who have more money tend to want more organic goods. Inferior goods are the opposite of normal goods. As the income in a household increases, the demand for inferior goods decreases (Bilbie, 2009). People tend to buy less of inferior goods when the income is higher and more of them when the income is low. With an increase in income, the consumers immediately start trading up inferior goods. A good example of an inferior good is bus transportation. When the income is low, the consumers will use a bus as a mode of transport rather than air or train transportation because it is cheaper though time-consuming. When the income increases then air or train mode of transportation is preferred more to bus transportation.

Elasticity and inelasticity of demand refer to the degree of response of demand and supply in relation to the change in price (Oum et al., 1992). When the change in demand corresponds closely to the change in the price of a commodity, then the demand is elastic. If the change in demand does not closely respond to the change in the price of a commodity, then it is termed as inelastic demand. A luxury good has a high-income elasticity of demand because as people become wealthier, they will tend to buy more of the luxury commodity. If there is decrease in the income then the demand of the luxury goodwill decrease.

References

Bilbiie, F. O. (2009). Nonseparable preferences, fiscal policy puzzles, and inferior goods. Journal of Money, Credit and Banking, 41(2‐3), 443-450.

Oum, T. H., Waters, W. G., & Yong, J. S. (1992). Concepts of price elasticities of transport demand and recent empirical estimates: an interpretative survey. Journal of Transport Economics and policy, 139-154

Sugden, R. (1985). Consistent conjectures and voluntary contributions to public goods: why the conventional theory does not work. Journal of Public Economics, 27(1), 117-124.