9-15 Lecture

9-15 Lecture - PAM 2000 Lecture Inferior goods McDonalds...

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PAM 2000 9/15/09 Lecture Inferior goods – McDonald’s, Chinese tires The same good can be normal and inferior over different levels of income Small increases of income, one might buy more of the good A, but if income is drastically increased, the good A might become an inferior good Plastic Surgery – normal good because health insurance doesn’t cover it. When a recession hits, this industry gets hit hard Counter-cyclical demand – when the demand goes up when income goes down (stock of McDonald’s during a recession) Substitution Effect – buy more what’s cheap and buy less of what’s expensive. Always operates in the same direction Income Effect – Y X1 X Movement between budget constraints. Depends on whether the good is inferior or normal. If normal good, shift of the budget constraint (loss of purchasing power) will cause a decrease quantity demanded. If inferior good, it is possible that a loss of purchasing power could cause an increase in quantity demanded. Ideal package is where the indifference curve is tangent to the budget constraint.
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This note was uploaded on 11/12/2009 for the course PAM 2000 at Cornell.

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9-15 Lecture - PAM 2000 Lecture Inferior goods McDonalds...

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