What I want to do in this video
is think about the demand curve
for two different products.
So this is some laptop
that's on the market.
And this, let's just say,
is the cheapest car
that happens to be on the market
this is actually a picture of a 1985
assuming this is the cheapest car on the market.
So let's just think about
their hypothetical demand curves right now
So once again, on the vertical axis,
we're going to put price,
and on the horizontal axis,
we put quantity,
and then over here
let me do it for the same thing
So this is price,
and this right over here is quantity.
And both of them satisfy the law of demand
if the price is really high
the quantity demanded is going to be really low for the laptop
and so it might be right over there
and if the price is low
the quantity demanded is going to increase.
So, the demand curve might look something like that.
And it doesn't have to be a curve,
or doesn't have to be a line,
it could be a curve or anything like that.
So that is the current demand for the laptop
All else equal,
so we're not talking about shifting any of those other factors
that we've been talking about in the last few videos.
Now we can draw a similar demand curve
for this very cheap automobile.
If the price is high,
very few people are going to want to buy it,
and I'm not going to specify what the price is,
but this is a general idea
if the price is higher,
fewer people are going to want to buy it
If the price is lower,
more people are going to want to buy it
So this demand curve will also have the same shape
from the top left to the bottom right
it satisfies the law of demand.
So once again, that is the current demand.
Now let's think about
how the demand for each of these goods might change
depending on changes in income.
So we're going to focus on the income factor
the income effect, for this video
and see how these 2 products might change.
So let's just assume that
income in the general population goes up.
So for something like a laptop, wow,
if more people are making more money
especially in real terms
they have more money to spend well
for any given price point,
at any given price point,
there's going to be a higher quantity
that's demanded.
At any given price point,
higher quantity demanded.
And so if income goes up for this laptop,
the demand will increase.
And the way we show demand increasing
is the whole curve shifts to the right
so this right over here demand increased
demand went up when income went up.
And this makes complete sense
and if income were to go down,
demand would go down
because people would have less money
to buy something like a laptop.
And this is the case for most goods
we call things like this,
when income goes up, demand goes up,
whole curve shifts to the right
income goes down, demand goes down,
whole curve shifts to the left
We call this a normal good.
So this right over here is a normal good.
Now let's think about
what happens with the cheapest car on the market.
And let's assume we're in a developed country
where almost everyone has some form of a car.
Now, what happens when income goes up?
So people have more money
but are they going to spend that money
buying the cheapest car on the market?
Well, in most cases, if income goes up generally,
people say, well I have a little bit more money,
maybe I'll buy a slightly nicer car.
So, and maybe in particular
the people who were going to buy this car
at any given price point
So this price point,
the people who were going to buy the car will say
Wait! I can now afford a better car!
Why should I you know,
this is not safe
maybe or not as safe as the other cars,
and I want to impress my friends
from high school and all that,
so something very strange might happen for this car,
the demand for this car.
It actually will decrease
so the whole curve could shift to the left.
So income is a very strange thing for this good
because income increasing maybe people say,
hey you know what,
I could trade out of this good
I could get a good that
I'd rather have than just getting more of this thing right over here
Demand went down.
And goods like this, we call them inferior goods.
And the general way to think about
inferior goods are the goods
that people will want to not own if they had more money
they would want to buy, I guess, less inferior goods.
Or another way to think about it is,
if income were to go down,
and more people are budget strapped
and they can't afford
the Mercedes-Benz or the BMW
or even the mid-sized sedan anymore,
so if income were to go down
and things were getting tighter,
more people would want this car
more people would have to trade down to this
because they're strapped,
they're tightening their belts
and so you'll have this strange situation
where if income goes down,
demand would go up for this thing
So income goes down,
demand goes up.
Remember, we're talking about demand,
we're talking about the entire shifting of the curve.
At any given price point,
the quantity demanded will go up.
Because, this is, or we're assuming,
is the cheapest car on the market.
So, and likewise,
if income were to go down for a normal good,
it'll do what you'll expect,
demand would go down.
So this, an inferior good,
does the opposite of a normal good
when we're talking about the income effect,
the inferior good will do the opposite of a normal good
and that's because people want to trade out of it
when their income goes up
or they don't want to buy it
or they want to buy something nicer.
And when their income goes down,
they'll say
I have to buy this thing,
so you know, let me just do it.