The first non-price factor that we look at is a change in income. We describe the impact of a change in income on demand with an events chain and also distinguish between normal goods and inferior goods.
After you have worked through this section of the learning unit, you should be able to:
- describe the impact of a change in income on demand in words and with the help of a chain of events
- distinguish between normal and inferior goods
Let's start with a question:
If my income increases, I buy more; and I think other households would do the same and the market demand would increase. Since an increase in income leads to an increase in demand, we have a positive relationship.
When income increases (all other things remaining the same) in a market, consumers normally buy more of most goods and services; and when income decreases, they normally buy fewer of most goods and services.
We can thus expect to see an increase in the demand for fried chicken pieces if household income increases.
In a chain of events, this is written as follows:
Hence there is therefore a positive relationship between income and the demand for fried chicken pieces.
When an increase in income leads to an increase in the demand for a good or service, the good is referred to as a normal good or service. Fried chicken pieces are therefore a normal good since an increase in income led to an increase in demand.
An inferior good, however, is a good or service whose demand decreases if income increases. For inferior goods, a negative relationship exists between a change in income and the demand for the good or service.