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Types Of Goods In Economics Economics Essay

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Published: Mon, 5 Dec 2016

Demand is the desire to own anything, and the ability to own for it. Demand is the relationship between two variables. The price and the quantity demanded.

The Law of Demand States That as the price of the goods & services increases consumer demand for the goods & services decreases & vice versa.

Law Of Demand

Let’s take an example of pizza, the consumers of the pizza increases as the price of the pizza decreases same as the consumers of the pizza decreases as the price of pizza increases, this follows the law of Demand.

Let’s take another example of butter when the price of the butter gets increases consumers switched to its substitute margarine, means when the price of the Products started increasing consumers started moving towards the substitute of the Products.

INFERIOR GOODS:

Inferior goods are those goods whose demands decrease when the income of the consumer increases and vice versa. Inferior goods are unlike normal goods which are opposite in nature, Normal goods are those whose demand increases when the income of the consumers increases and vice versa.

An example of inferior good is old car , consumers will generally prefer old cars when their income is limited. As the income of the consumers increases the demand for the old cars will decrease while the demand for the costly car increases so the cheaper cars are the inferior goods.

Bus services is also an example of the inferior good, this form of transportation is cheaper then air and train transportation. When the income of the consumers is limited then travelling by bus is more acceptable while it is more time consuming but when money is more abundant then time then faster transport will be choosen by the consumer.

http://upload.wikimedia.org/wikipedia/commons/5/5a/Inferior_good.png

Good Y is a normal good since the amount purchase increases from Y1 to Y2 as the budget constraint shifts from BC1 to the higher income BC2. Good X is an inferior good since the amount bought decreases from X! to X2 as income decreases.

Giffen Goods:

Giffen good is one which people consumes more of as their price rises. in giffen good situation income effects dominate, leading people to buy more of the goods even as its price rises. As in Demand price and quantity demanded pull in opposite direction, if price goes up, then quantity demanded goes down, or vice versa. Giffen goods are an exception to this, their price elasticity of demand is positive, when price goes up, the quantity demanded also goes up and vice versa. In order to be a true giffen good, price must be the only thing that changes to get a change in quantity demand.

http://2.bp.blogspot.com/_NXS1mcY2wvU/ShugH2xFzYI/AAAAAAAAABU/R8ceX0KKHGk/s400/giffen+good.jpg

http://www.oup.com/uk/orc/bin/9780199586547/01student/advanced/figures/fig022.jpg

In the case of a Giffen product the income effect leads to a fall in the quantity demanded. This means that following a price fall the overall the quantity demanded falls. This means the demand curve is upward sloping. This is shown in the diagram above.

File:Types of goods.svg

TYPES OF GOODS IN ECONOMICS

All Giffen goods are inferior goods but not all inferior goods are Giffen goods.

Giffen goods are difficult to find because a number of conditions must be satisfied for the associated behavior to be observed. One reason for the difficulty in finding Giffen goods is Giffen originally envisioned a specific situation faced by individuals in a state of poverty. Modern consumer behaviour research methods often deal in aggregates that average out income levels and are too blunt an instrument to capture these specific situations. Furthermore, complicating the matter are the requirements for limited availability of substitutes, as well as that the consumers are not so poor that they can only afford the inferior good

Some types of premium goods (such as expensive French wines, or celebrity-endorsed perfumes) are sometimes claimed to be Giffen goods. It is claimed that lowering the price of these high status goods can decrease demand because they are no longer perceived as exclusive or high status products. However, the perceived nature of such high status goods changes significantly with a substantial price drop. This disqualifies them from being considered as Giffen goods, because the Giffen goods analysis assumes that only the consumer’s income or the relative price level changes, not the nature of the good itself. If a price change modifies consumers’ perception of the good, they should be analyzed as Veblen goods. Some economists question the empirical validity of the distinction between Giffen and Veblen goods, arguing that whenever there is a substantial change in the price of a good its perceived nature also changes, since price is a large part of what constitutes a product However the theoretical distinction between the two types of analysis remains clear; which one of them should be applied to any actual case is an empirical matter.

A Giffen good is one which people consume more of as price rises, violating the law of demand. In normal situations, as the price of such a good rises, the substitution effect causes people to purchase less of it and more of substitute goods. In the Giffen good situation, cheaper close substitutes are not available. Because of the lack of substitutes, the income effect dominates, leading people to buy more of the good, even as its price rises.

An inferior good is a good that decreases in demand when consumer income rises, unlike normal goods, for which the opposite is observed. Normal goods are those for which consumers’ demand increases when their income increases. Inferiority, in this sense, is an observable fact relating to affordability rather than a statement about the quality of the good. As a rule, too much of a good thing is easily achieved with such goods, and as more costly substitutes that offer more pleasure or at least variety become available, the use of the inferior goods diminishes.

Depending on consumer or market indifference curves, the amount of a good bought can increase, decrease, or stay the same when income increases.

For inferior goods the demand decreases as income increases since when u get richer u go for nicer things eg tesco value tights. the poorer u are the more you did demand for it cause u can’t afford anything else, whereas M&S tights would be in higher demand with increase in income cause they are nicer.

Giffen goods are exactly opposite people want more of it with higher income

Example a posh car. The richer u is the more likely u is to be able to afford it so the higher the demand in the economy as a WHOLE.


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