Demand Curves and Income Effects

Flashcards about demand curves and the income effect.

Demand Curve

A graphical representation showing the relationship between the price of a good or service and the quantity demanded for a laptop.

Price

The vertical axis represents this factor on a demand curve.

Quantity

The horizontal axis represents this factor on a demand curve.

Law of Demand

States that as price increases, quantity demanded decreases, and vice versa.

Quantity demanded increases

What happens to the quantity demanded of a laptop if the price decreases?

What happens to the demand curve for laptops it the income of the general population increase?

Demand will increase, shifting the curve to the right.

Normal Good

A good for which demand increases when income increases.

What happens to the demand curve for a normal good when income increases?

The demand curve shifts to the right.

What generally happens to the demand for the cheapest car on the market when income increases?

People will be less likely to buy the cheapest car; demand decreases.

Inferior Good

A good for which demand decreases when income increases.

What happens to the demand curve for an inferior good when income increases?

The demand curve shifts to the left.

What happens to the demand for the cheapest car if incomes decrease?

Demand will increase as people trade down to cheaper options.

What happens to the demand for a normal good if income decreases?

Demand will decrease as people have less money to spend.

Why does demand behave differently for an inferior good versus a normal good?

People want to trade out of it when their income goes up.

Income Effect

Changes in income affect the demand for both normal and inferior goods.

How does demand for a normal good change if income increases?

If income goes up, demand goes up.

How does demand for a normal good change if income decreases?

If income goes down, demand goes down.

How does demand for an inferior good change if income increases?

If income goes up, demand goes down.

How does demand for an inferior good change if income decreases?

If income goes down, demand goes up.

What might people want to do if their income increases and they were previously consuming an inferior good?

They want to buy less of an inferior good.

What would happen to the demand for the cheapest car on the market if people are budget-strapped?

More people would want to buy the cheapest car.

What happens to the demand of an inferior good, if more people are budget strapped?

Demand will increase.

Income Effect

Focuses on how changes in income affect consumer demand.

Inferior Good vs. Normal Good

An inferior good does the opposite of a normal good in relation to the income effect.

What is a typical consumer behavior when their income increases, assuming they were previously buying an inferior good?

People want to buy something nicer or of better quality.