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AP®︎/College Microeconomics
Unit 2: Lesson 1
Demand- Markets and property rights
- Law of demand
- Deriving demand curve from tweaking marginal utility per dollar
- Market demand as the sum of individual demand
- Substitution and income effects and the law of demand
- Markets, property rights, and the law of demand
- Price of related products and demand
- Change in expected future prices and demand
- Changes in income, population, or preferences
- Normal and inferior goods
- Inferior goods clarification
- Change in demand versus change in quantity demanded
- Demand and the determinants of demand
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Inferior goods clarification
The concepts of normal goods and inferior goods can be tricky, and the definitions can be somewhat subjective as well. In this video, we take a deeper look at these kinds of goods. Created by Sal Khan.
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- Is it possible for demand curves to shift and overlap one another or is it generally the case that this doesn't happen? If it does happen, how does this effect defining the transition between a normal and inferior good? Just curious in case Sal doesn't mention this in a later video that I haven't gotten to yet.(14 votes)
- I would disagree. Just think of comparing the price vs quantity demanded for 2 different groups. If they are both linear, and if the have different slopes, then they will cross paths at some point meaning both groups will have the same quantity demanded at the same price.(12 votes)
- With increase in income, the population that couldn't afford even the inferior good (cheapest of all three cars), will now start buying it. Wouldn't this counter any decline in demand for the inferior good?(7 votes)
- Not really, since we were assuming everyone had a car already, because it was a necessity.(10 votes)
- What are some other examples of inferior goods besides cars?(3 votes)
- Potatoes you'll still have to cut yourself. When incomes go up people start buying the ones that are already peeled and cut.
Fans are inferior too. When people start earning more they'll probably start switching to an aircon.
Pretty much everything bought in a discount store like Walmart is inferior. It's cheap, but it's also low quality.
As a final example, if you'll have to travel over long distances the bus is an inferior service. Air or rail travel is faster and more convenient.(13 votes)
- Does the cheap car HAVE to be the absolute cheapest product on the market for the demand to decrease as the income increases?(5 votes)
- Consider the Sedan ( middle car ) case. If there is a change in income so big that the chunk Rolls-Royce takes from the Sedan is bigger than the chunk the Sedan takes from the inferior good, than the Sedan becomes an inferior good itself. Inferior good is an economics term not a description of a perticular product. For something to be inferior it only needs to fit in the category of goods that are sold less when the income of the population rises.(6 votes)
- Sal talked about "Inferior Goods" and "Normal Goods", are there "Superior Goods"?(5 votes)
- Yes, but not by that name. They're known as 'Luxury Goods', and their demand increases disproportionately in relation to income.(3 votes)
- Is the term "inferior" based solely on price? Some products (eg cars) are cheap because they are mass produced but are a much better than a hand made car that is more expensive(5 votes)
- No, we talk of inferior in terms of what people would be more willing to buy if they had sufficient money(or appropriate income). Also, when we are talking of quantity demanded, we do not consider the price. The 'cheap' car might interest the general population instead of the hand made one which will be less worth buying. So, when there is a rise in income, there will be a greater rise in the 'cheap' car (for those who could not afford it previously) than the hand made car. Thus, the hand made car is seen as an inferior good in this context. I want to make that clear: when we talk of inferior or normal, we are considering the preferences of the population rather than price (though they are related in many cases). Hope that helps.(2 votes)
- How would you specify the differences between a normal good and a luxury good?(2 votes)
- It's to do with income elasticity of demand. I think you might learn about this in a future lesson.
Basically the strict way to define between these goods are that inferior goods have a YED (Income elasticity of demand) of < 0, Normal goods have a YED of > 0, and Luxury goods have a YED of > 1.
Put simply it's to do with how volatile the change in demand is compared to the change in income. If incomes were becoming smaller (such as an economic downturn) the decrease in demand for luxury goods would be far greater than the decrease in demand for normal goods, Relative to the size of their original demands of course. The opposite is also true of course.(5 votes)
- Is it possible for the quantity of demand to go down when the price is dropped? For example, if someone's selling a car for 15$, it would seem suspicious, and few people would buy it. Right?(3 votes)
- yes that's possible but remember that the law of demand assumes ALL ELSE IS EQUAL
So if people were buying the car when it cost $10000 we assume - in this model - that when it costs $15 they still have the same information about its quality and the same desire to own the car and the ONLY thing that is different is that the price went from $10000 to $15, so of course they would like to buy more of these cars at this price.
But you are correct to observe that the law of demand may not always hold in real life, and that's an important aspect of learning economics, to realize that all models have assumptions and limitations that are important to understand before you draw any conclusions.(3 votes)
- I really appreciate of your efforts! These videos helped me a lot and I am really thankful.
I wanted to ask that are there any practices/exercise for us to solve. I guess by solving problems, we would learn better.
My suggestion is asking/having some critical questions at the end of each video would be a great chance for us, students, to think and post the answers here!(3 votes)- Unfortunately, the economics playlist isn't meant to replace an actual course on the subject, just complement it by drawing the graphs and giving students the ability to visually see what is happening.(1 vote)
- What about in the case of a giffen or a luxury good? how would they react to a change in income. Graphically.(2 votes)
- A Giffen good is an inferior good and hence its demand will increase with a decrease in the income, causing the demand curve to shift rightward and vice versa in case of an increase in income.
The demand of a luxury good will increase with an increase in income while fall with a decrease in income. Hence the demand curve of a luxury good will shift rightward in case of an increase in income and leftward in case of a decrease in income.(3 votes)
Video transcript
I sensed some confusion
coming out of the last video. And for your good, so I
thought I would do another one. So let's make, let's
assume that there's three cars in the
market, and what I want to do with this is I
sense that some people thought that I was suggesting that a car
in general is an inferior good, and that's not
what I was saying. I was saying, if we
lived in a reality where everyone owned a car and
a car was a necessity for life, and that is true in much
of the developed world, I was saying that the
cheapest car in the market might be considered
an inferior good. And to think about
that, let's just think about the
entire population. So let's say this
line, this line represents the entire
population in our place, in our developed country,
where everyone owns a car. And let's say, let's represent
this car with a blue. So let's say maybe 1/3 of the
people right now have that car. Now, let's say a good
chunk of the people have this midsize sedan,
this is probably the car that most people would like to
have, it's a little bit safer, it's a little bit larger,
it's a more powerful engine. And so this is where
most people are sitting. And then you have this
ultra, this kind of luxury, you have this luxury
car, Rolls Royce maybe. And so that is a
very small segment. So this end of the line is
the poor, in our population. This is the rich
right over here. So this is at some
given income level, and maybe we could say this
is true at a particular price point. But what we're going
to talk about is the general impact
on demand-- so on the entire curve at
any given price point, always assuming that this
is the most expensive, this is in between, and
this is the least expensive. Now, what happens if
income goes up from here? Well, the very
poorest, they're not going to be able to
necessarily just trade up to this midsize sedan
yet, although they maybe have more income
for other things or maybe they can get a
nicer version of this. But for the most
part, they're still going to be driving this car. But at kind of the
boundary right over here, if the incomes do
go up, there will be people who now could
afford the mid-size car, and that's what they want. And so these people might
start buying the midsize car. And then what will happen
over here, well, maybe there's a few people at the
boundary over here, they now have the money to
afford this very expensive car, and it suits their tastes. And so they also, a very small
proportion, also grows there. So what happened here? When income went
up, the quantity demanded at a
particular price point for this smallest car went down. But the demand for this
midsize car went up, it took a much bigger
chunk out of this blue than a chunk was taken
out of it by the orange, and also the demand for this
very expensive car went up. And that was at a
particular price point, but assuming that this
is the most expensive, this is the middle, and this
is the cheapest expensive, this would be true of
probably any price point. And so we have this phenomenon
that when income went up, the quantity demanded
at multiple price points for this car-- so let me
draw its actual demand curve. So this car right over here,
this is price, this over here is demand. If its old demand curve
looked something like this, we're saying-- and maybe when
we thought about this at first, we're thinking of
the price point right over here, we notice
when income went up, at that particular price
point, the quantity demanded went down, and that'd
be true pretty much any price point, assuming that this
is always the cheapest car. So at any price point, you
would have a decrease in demand. Remember, when we talk
about a decrease in demand, we're talking about a
shift of the entire curve, we're not talking about just
one particular quantity. Now, there's another interesting
question that was asked, and I think it was a very
nice and subtle thing to think about. I keep drawing these
shifting demand curves, and if at least I understand
the question properly, the question is
well, does the curve, when it shifts, does it
necessarily shift perfectly or does sometimes it change? Does it shift more at one
price point or another? And the simple answer is it can. In fact, in very few
circumstances would it probably be a perfect shift. Depending on the
price point you're at, it would probably shift
a little bit different. So the actual shape
of the curve might change while it's shifting. But anyway, going back to this,
so we see this cheap car right here had the unusual property
that when incomes went up, the demand curve
shifted to the left. And that's why we call
this an inferior good. These other two cars when--
so that's price, and this is demand-- these other two
cars when income went up-- so if this was the demand curve
at first-- when income went up, demand went up. The whole curve got shifted to
the right, so they are normal. So these are normal goods.