Thread: Micro Economics
View Single Post
  #5  
Old Saturday, January 05, 2008
Khyber Khyber is offline
Senior Member
 
Join Date: Sep 2006
Location: Oyster
Posts: 126
Thanks: 18
Thanked 20 Times in 13 Posts
Khyber is on a distinguished road
Default

Quote:
Originally Posted by ARMAN
Inferior Goods Are Like Milk And Wheat These Agoods Are Important For Human Beings.and Normal Goods Are Like Cold Drinks Ans Etc Like Something That We Can Live Without That.
With apology, this definition is diametrically non-technical with respect to "Economics" and in exams it carries certitude of "Zero Marks" in case you write aforementioned definition.

Normal Good is the one which has positive relation with your income whereas inferior or strong inferior (Giffon) has negative relation. As regards Strong Inferior Good (Giffon) then in theory it exists but in practical there is no real instance of "Giffon Good". Here, i paste some of my personal notes which i prepared during my first semester at Quaid-i-Azam University Islamabad.
I hope you will find it of great worth. If any further help is solicited by you then feel free to let me know via PM.

Basics of demand

1. Concept of demand


i- Desire
ii- Price
iii- Willingness
iv- Ability to purchase


All the commodities which has ability to satisfy humans and must have price and willingness to purchase, economic good is one which has ability to satisfy humans and have price is called “good” and dissatisfy is called “bad commodity” and not have ability to satisfy humans is called “neutral commodity”.

“A commodity which a person would be willing and financially able to purchase at various prices and have desire is called “Demand”.

2. Demand function


Factors on which demand depends

DX = f (PX, PY, Income)

[Assume other is not measurable just like taste, habits and preferences]
3. Determinants of demand

i- Own price
Change in price of commodity leads change in demand

∆ PX ∆ DX
When ever price of commodity changes it have two effects

1. Substitution effect
Commodity becomes relatively cheaper or expensive as compare to other commodities.
|X1| PX1 = 10 to PX1 = 20
|X2| PX2 = 20
2. Income effect
Purchasing power of consumer change “real income” change
Case 1
Let PX increases:


PX increases  Real income decreases  DX decreases

Income effect will be negative (-)

PX increases  relatively expensive as compare to X2  DX decreases

Substitution effect will be negative (-)


Price effect = Income effect + Substitution effect
(-) = (-) + (-)

Positive Relationship [+ shows Normal Good]


PX increases  Real income decreases  DX decreases


Negative Relationship


 Normal commodity has negative (-) relationship with price and positive (+) with real income
Negative Relationship [- shows Inferior Good]


PX increases  Real income decreases  DX decreases


Positive Relationship

 Inferior commodity has positive (+) relationship with price and negative (-) with income
Income effect + Substitution effect = Price effect

Normal Good (-) + (-) = (-)

|IE| > |SE| (+) Giffen
Inferior Good (+) + (-) =
|IE| <|SE| (-) Inferior





ii- Cross price

Change in PX1 will leads to change in demand of X commodity or may not change
∆ PY ∆ DX or ∆
Case 2
Let PX increases:


i. DX decreases  Complimentary goods (use together)

Petrol price increases  Demand for cars decreases (complimentary goods)


ii. DX increases  Substitutes goods (In place of others)
Sweater price increases  Demand for coats increases (substitute goods)


iii. DX increases  unrelated goods (Neutral goods)

Milk price increases  Demand for shoe constant (unrelated goods)


iii- Income of consumer

Let Income (Y) increases:


Positive Relationship [+ shows Normal Good]


Y increases  DX increases


Negative Relationship [- shows Inferior Good]


Y increases  DX decreases (low)


Negative Relationship [- shows Giffen Good]


Y increases  DX decreases (high)

Conclusion:
(+) Giffen/Strong inferior
1. Own Price with demand
(-) Normal good



(+) Substitute goods
2. Cross Price with demand
(-) Complimentary goods



(+) Normal goods
3. Income with demand
(-) Inferior good
Reply With Quote
The Following 2 Users Say Thank You to Khyber For This Useful Post:
Faraz_1984 (Thursday, September 11, 2008), Zaka (Monday, March 24, 2008)