Answer to Question #157558 in Macroeconomics for Kanupriya

Question

Using suitable diagram explain impact of following on equilibrium:

Decrease in income where X is inferior good

Answer 1

 

An inferior good is a type of good whereby with a rise in income, the demand of the good decreases while with a fall in income, the the demand increases.

Demand of inferior goods shows an inverse relationship with consumer's income.

Good X is an inferior good since the amount demanded increases from X2 to X1 as income decreases

Demand curve of inferior good shifts out when income decreases and shifts in when income increases. 

This is because inferior goods are affordable and adequately fulfill their purpose, but as more costly substitutes that offer more pleasure (or at least variety) become available, the use of the inferior goods diminishes.