2.5. INCOME, TASTES & Expectations
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A change in the level of real income affects the demand curve. We use income elasticity of demand to measure the relationship between a change in the quantity demanded of good x and a change in real income. Income elasticity of demand is measured by:
We have various types of goods.
Inferior Goods
Inferior goods are those goods or services that usually have a superior good available. For example, low priced food is usually seen as an inferior good compared to premium goods. As the income levels of consumers fall, the demand for inferior goods increases, meaning inferior goods have negative income elasticity. During the recession, many consumers chose to switch from buying their groceries at Tesco, Asda and Sainsbury’s and instead chose to shop at discount places like Lidl, Aldi and B&M.
Inferior goods are those goods or services that usually have a superior good available. For example, low priced food is usually seen as an inferior good compared to premium goods. As the income levels of consumers fall, the demand for inferior goods increases, meaning inferior goods have negative income elasticity. During the recession, many consumers chose to switch from buying their groceries at Tesco, Asda and Sainsbury’s and instead chose to shop at discount places like Lidl, Aldi and B&M.
Tastes
Taste is a factor that influences demand. A change in taste can come about because of social and emotional factors. These can be because of advertising or endorsement by celebrities. In addition, if there was more information, which came to light over the consumption of a good, it could affect the demand for that good. For example, cigarette advertising and education has changed people’s attitudes towards smoking and this has influenced demand (demand has decreased because consumers are more aware of the effects of smoking. Demand has shifted to the left).
Taste is a factor that influences demand. A change in taste can come about because of social and emotional factors. These can be because of advertising or endorsement by celebrities. In addition, if there was more information, which came to light over the consumption of a good, it could affect the demand for that good. For example, cigarette advertising and education has changed people’s attitudes towards smoking and this has influenced demand (demand has decreased because consumers are more aware of the effects of smoking. Demand has shifted to the left).
Expectations
Expectations are key in Economics. Economic agents are always formatting expectations. If consumers expect there to be a release of a new product, such as a new phone with a bigger memory and longer battery, they may choose to delay their purchase. Also, if individuals believe that the price of a good will increase in the future, they may choose to buy now instead of buying later. In addition, if a worker is worried about his job security or the future, they may choose to decrease their consumption now as a precaution even though they haven’t yet lost their job.
Expectations in the economy are crucial.
Expectations are key in Economics. Economic agents are always formatting expectations. If consumers expect there to be a release of a new product, such as a new phone with a bigger memory and longer battery, they may choose to delay their purchase. Also, if individuals believe that the price of a good will increase in the future, they may choose to buy now instead of buying later. In addition, if a worker is worried about his job security or the future, they may choose to decrease their consumption now as a precaution even though they haven’t yet lost their job.
Expectations in the economy are crucial.