Answer to Question #215589 in Microeconomics for Tobex

Question

The X-Corporation produces a good (called X) that is a normal good. Its competitor, Y-Corp., makes a substitute good that it markets under the name Y. Good Y is an inferior good. 

a. How will the demand for good X change if consumer incomes decrease? 

b. How will the demand for good Y change if consumer incomes increase? 

c. How will the demand for good X change if the price of good Y increases? 

d. Is good Y a lower-quality product than good X? Explain.

Answer 1

Normal goods are those goods for which the demand rises as consumer income increases or demand falls when consumer income decreases. For inferior goods the demand decreases when income increases and demand increases when consumer income decreases. In short other things remaining constant as the income of consumer increases, demand for normal good will increase and demand for inferior goods will decrease and vice versa.

Here good X is a normal good and good Y is an inferior good. Good Y is also a substitute for good Y.

a. The demand for good X decreases if the consumer income decreases. This is because good X is a normal good whose demand falls with a fall in income.

b. The demand for good Y decreases if consumer income increases since good Y is an Inferior good. For inferior goods demand falls with income increases.

c. When the price of good Y increases, the demand for good X increases. This is because good X and good Y are substitute goods. As the price of one good increases the demand for its substitute good will increase.

d. Good Y need not be a lower quality product than good X. The term inferior good refers to its affordability rather than its quality. Usually consumers with low income are attracted towards Inferior goods because they are more affordable. Some inferior goods may be good quality products but they have substitutes with higher prices. As consumer income increases they can afford expensive substitutes. The shift in demand can be of different reasons like quality, additional features or because of socio-economic status. Some goods are considered inferior because of tradition or geographical features. Certain products considered inferior in one region can be a normal product in some other region.

Thus we cannot always interpret an inferior good as a lower quality product.