Normal - however, the results will be different. Why is...

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Normal, Inferior, and Giffen Goods There are some exceptions, however: not all goods are normal goods. For instance, if an increase in your income causes you to buy less of a good, that good is called an inferior good. For instance, "poor college students" often satisfy themselves with generic soda and cheap ramen. When they get jobs and a steady income, however, they might forego the cheap soda and ramen in favor of Coke and pasta. In this example, the generic soda and cheap ramen are inferior goods. Income and substitution effects change demand differently with different types of goods. For instance, we have been looking at income and substitution effects when a buyer is faced with a choice between two normal goods. An increase in the price of good A will cause a decrease in consumption of A, and an increase in consumption of good B (assuming that the substitution effect is stronger than the income effect). If good A is a normal good, and good B is inferior,
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Unformatted text preview: however, the results will be different. Why is this true? Consider the case where the price of good A goes up. Income and Substitution Effects with Normal and Inferior Goods The substitution effect makes B relatively cheaper, so consumption of B will increase, and consumption of A will decrease. The income effect makes the buyer feel poorer, and so consumption of A will decrease, but consumption of B will increase. Remember that consumption of an inferior good varies inversely with income: when you are rich, you buy less, when you are poor, you buy more. If the A is still normal and B is still inferior, and the price of A falls, then the substitution effect will cause higher consumption of A and lower consumption of B, and the income effect will cause higher consumption of A and lower consumption of B. Because the buyer now feels richer, they are less inclined to buy the inferior good....
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Normal - however, the results will be different. Why is...

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