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If a 10 percent increase in income results in a 20 percent increase in the quantity of...

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yaga49 | (Level 1) Valedictorian

Posted April 23, 2013 at 2:46 PM via web

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If a 10 percent increase in income results in a 20 percent increase in the quantity of DVDs demanded at a given price, are DVDs are normal or inferior goods.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted April 23, 2013 at 3:07 PM (Answer #1)

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Clearly, the DVDs in this scenario are normal goods.   Let us look at the definition of demand and of normal and inferior goods to see why this is so.

Demand can be defined as the amount of a good or service that people are willing and able to buy at every given price.  In other words, demand is not a point, it is a line.  When using the terms in their precise economic meaning, an increase in price does not cause a decrease in demand, it causes a decrease in quantity demanded.  When demand increases, the entire line has moved and people are willing to buy more of a product even if its price has not changed.

Why would people buy more of a product if the price has not changed?  One reason is that they have gotten more income.  In general, if you have more money, you will want to buy more of the things you like.  For example, if you like movies, you will probably go to more of them if you have more income.  When your demand for something rises with your income, we call that product a “normal good.”

By contrast, there are some things for which demand actually rises as income drops.  These are things you would only buy if you can’t afford better.  We call them “inferior goods.”

In the DVD scenario, consumer income has risen and demand has risen as well.  Clearly, this is a normal good.

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