- 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
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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- At around3:37shouldn't the x-axis on the graph be quantity demanded? If not, then why?(42 votes)
- Absolutely! It should be "Quatity demanded" and not "demand", as Sal pointed out in previous videos. Demand is the entire curve.(66 votes)
- How would you specify the differences between a normal good and a luxury good?(9 votes)
- "Luxury" versus "normal" is greatly in the eye of the beholder (especially how rich the beholder is). I would say a luxury is an item for which there is a perfectly suitable and much cheaper equivalent item available. Typically a luxury item is something whose excessive cost is justified to the purchaser because it provides a boost to their ego since it signifies to the rest of the world that they are wealthy (or stupid if they can't afford it).
A purse from Penny's will hold the same stuff as one from Gucci. The one from Gucci may be made of better materials (but not necessarily) and last longer. However, you can buy a lot of purses from Penny's for the price of one from Gucci. That is why most folks would characterize the Gucci purse as a luxury item.(29 votes)
- So how would the demand curve of the cheapest car that is considered an inferior good change, if a new, even cheaper car was introduced to the market?(2 votes)
- What a great question! My instinct would be that, should a "more inferior" good come on the market, this car would become normal near the bottom of its demand curve (but would remain inferior at higher prices). If we consider an inferior good to be a good with costly substitutes (e.g., hot dogs and filet mignon), this should make sense.
Let's consider a market with Civics, Mustangs, and Ferraris (keeping the assumptions from the video—that everyone needs a car). As income drops, Civics become in greater demand (less people can afford Mustangs); as incomes rise, Civics are in less demand (more people can afford Mustangs). The Civic is an inferior good.
Now let's add a Pinto, which becomes the new inferior good. My thought is that Civics will now become normal goods at lower prices, since they are the "costly substitute" to the Pinto at those prices. When income drops, people will buy more Pintos and less Civics. However, at higher prices no one is buying Pintos, so the Civic becomes the inferior good.
I could be off-base, but really appreciate the question; it made me think critically about inferior goods.(34 votes)
- 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.(11 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.(11 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?(6 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)
- 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 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.