Answer to Question #184540 in Microeconomics for belinda

Question

Maize is considered to be an inferior good. Assume that the original demand curve is D1 and the original supply curve is S1.

1.Explain the impact of an increase in income on the maize market .

2.Explain the impact of an increase in the price of rice(a substitute in consumption for maize) on the maize market.

3.Explain the impact of an increase in wages for farm labourers on the maize market.

Answer 1

1. An increase in income leads to a decrease in the purchase and consumption of maize i.e. demand for maize drops. This is as a result of the inferiority of maize and the shifting of the consumers' focus to the consumption of more normal goods.
2. The fist law of demand states that the higher the price of a commodity, the lower the quantity demanded of it and vise versa, ceteris paribus. Because rice is a substitute for maize, and an increase in its price means less consumption and less demand for it, the consumption and demand for maize increases, holding the assumptions that i) maize is inferior and the relative price of its substitute makes it more economical to consume; ii) the price of maize doesn't change.
3. The demand for and supply of labour must be considered in wage determination in the maize market. Since the good is inferior and it's elasticity, elastic, an increase in the wages of farm labourers without a corresponding increase in the supply of maize means less profit for farm owners. To avoid this, farm owners hire less labourers ( this generally leads to a decrease in the quantity of farm labourers employed) and pay them (farm labourers) a little above the equilibrium wage rate and below the wage increase.