Inferior Goods Clarification

More clarification on inferior and normal goods

I sensed some confusion

coming out of the last video on inferior goods.

So, I thought I would do another one.

So let's make --

Let's assume that there [are] three cars in the market.

And what I want to do is --

I sensed that some people thought I was suggesting

that a car, in general, is an inferior good.

And that's not what I was saying. I was saying

if we lived in a reality where everyone owned a car --

your car was a necessity for life --

and that is true in much of the developed world --

I was saying that the cheapest car on the market

might be considered an inferior good.

And to think about that,

let's just think about the entire population.

So let's say that this line -- this line represents

the entire population in our place --

in our developed country

where everyone owns a car.

And let's say -- let's represent this car with blue.

So, let's say a third of the people right now have that car.

And now, let's say a good chunk of the people

have this mid-sized sedan.

This is probably the car

that most people would like to have.

It's a little bit safer. It's a little bit larger.

It [has] a more powerful engine.

And so, this is where most people are sitting.

And then you have this ultra --

this kind of luxury car -- a Rolls Royce, maybe.

And so, that [is] a very small segment.

So, this end of the line is the poor --

So, this is the poor in our population.

And this is the rich, right over here.

So this is at some given income level.

And maybe we could say

this is true at a particular price point.

But we'll see -- what we're going to talk about

is the general impact on demand --

on the entire curve at any given price point --

always assuming that this is the most expensive,

this is in between, and this is the least expensive.

Now, what happens if income goes up from here?

WRITING: Income goes up.

Well, the very poorest,

they're not going to be able to necessarily

just trade up to this mid-size sedan yet.

Although, maybe they'll have more income for other things --

or they can get a nicer version of this.

But for the most part,

they're still going to be driving this car.

But at kind of the boundary right over here,

if incomes do go up,

there will be people who can now afford the mid-sized car,

And that's what they want.

And so, these people might start buying the mid-size car.

And then what will happen, over here?

Well, maybe there [are] a few people

at the boundary over here --

they now have the money to afford this very expensive car.

And it suits their taste.

And so they also -- a very small proportion also grows there.

So what happened here?

When income went up, the quantity demanded

at a particular price point for this smallest car, went down.

But the demand for this mid-size car went up.

It took a much bigger chunk out of this blue

than a chunk was taken out of it by the orange.

And also, the demand for this very expensive car went up

And that was at a particular price point.

But assuming this is the most expensive, this is the middle,

and this is the [least] expensive,

this would be true of probably any price point.

And so we have this phenomenon that when income went up --

the quantity demanded at multiple price points for this car --

So let me draw its actual demand curve.

So [for] this car right over here, this is price;

this over here is demand.

If its old demand curve looks something like this,

we're saying that maybe when we thought about this,

at first, we're thinking of --

we were thinking the price point right over here,

we notice when income went up,

at that particular price point,

the quantity demanded went down --

and that would be true at pretty much any price point --

assuming that this is always the cheapest car.

So at any price point,

you would have a decrease in demand.

Now, remember.

When we talk about a decrease in demand,

we are talking about a shift of the entire curve.

We're not talking about just one particular quantity.

Now, there was another interesting question

that was asked.

And it's a very nice and subtle thing to think about.

I keep drawing these shifting demand curves,

And if, at least, I understand the question properly,

the question is does the curve, when it shifts,

does it necessary shift perfectly?

Or does, sometimes, it change?

Does it shift more at one price point or another?

And the simple answer is it can.

In fact, in very few circumstances

would it probably be a perfect shift.

Depending on the price point you're at,

it would probably shift a little bit different[ly].

So, the actual shape of the curve might change

while it's shifting.

But anyway, going back to this.

So, we see that this cheap car, right here,

had the unusual property that when the incomes went up,

the demand curve shifted to the left.

And that's why we call this an inferior good.

These other two cars, when --

WRITING: So, that's price. And this is demand.

These other two cars, when income went up --

So, this is the demand curve at first.

When income went up, demand went up.

The whole curve got shifted to the right.

So, they are normal --

So, this -- these are normal goods.