LONG RUN, MICROECONOMICS: In terms of the microeconomic analysis of production and supply, a period of time in which all inputs in the production process are variable. The long run is primarily used to analyze production decisions for a firm and is also referred to as the planning horizon. The long run is a period of time in which a business can change the quantities of ALL resource inputs--labor, capital, land, and entrepreneurship. Nothing is fixed. If your factory is to small, well then, build a bigger one. The long-run analysis of production is used to better understand economies of scale, diseconomies of scale, and long-run market supply.
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A good for which a change in income causes an opposite change in demand. That is, an increase in income causes a decrease in demand and a decrease in income causes an increase in demand. The income elasticity of demand for an inferior good is negative. An inferior good is one of two alternatives falling within the buyers' income demand determinant. The other is a normal good. An inferior good is one that reacts negatively to changes in buyers' income. If buyers have more income, then they purchase less of an inferior good. If they have less income, then they increase purchases of an inferior good.
Doing Less with MoreAs a general rule, if buyers have more income, then they buy more goods. Because the demand for most goods react in this positive manner to changes in buyers' income they are termed normal goods.
However, not all goods react in a positive way to income. For inferior goods, an increase in income results in a decrease in demand.
An inferior good is not necessarily a good that is defective or made with "inferior" materials. It is so named because it tends to be less expensive than other more desirable goods. As such, when buyers have more income and can afford to buy the more expensive products, they tend to reduce their purchases of the inferior goods.
Consider this illustration of an inferior good. When Duncan Thurly first reached adulthood many years ago, he eked out a living working at minimum wage jobs. His income was quite limited in those early lean years. When it came to demanding clothing, the best he could afford was denim blue jeans and white T-shirts. Khaki slacks and turtleneck sweaters were more to his liking at this time, but beyond his financial reach.
However, once Duncan worked his way up the occupational ladder and his income increased, he was inclined to modify his wardrobe. He purchased nothing but khaki slacks and turtleneck sweaters. As such, he no longer found the need for denim blue jeans and white T-shirts. His demand for denim blue jeans and white T-shirts decreased with his additional income. For Duncan, denim blue jeans and white T-shirts were inferior goods.
Of course, should Duncan have a decline in his income, such as what might happen if he is laid off from his high-paying job due to philosophical differences over the ownership of company office supplies, then he might be inclined to increase his purchases of denim blue jeans and white T-shirts once again.
Shifting the Demand Curve
A change in buyers' income causes the demand curve to shift. This can be illustrated using the negatively-sloped demand curve for denim blue jeans presented in this exhibit. This demand curve captures the specific one-to-one, law of demand relation between demand price and quantity demanded. Buyers' income is assumed to remain constant with the construction of this demand curve.
Now, consider how changes in buyers' income shift the demand curve for this inferior good.
- Increase in Income: An increase in buyers' income causes a decrease in demand and a leftward shift of the demand curve for denim blue jeans. Click the [Income Increase] button to demonstrate.
- Decrease in Income: A decrease in buyers' income causes an increase in demand and a rightward shift of the demand curve for denim blue jeans. Click the [Income Decrease] button to demonstrate.
A Normal AlternativeThe alternative to an inferior good is a normal good. A normal good exists if buyers are inclined to buy more of the good when they have more income. A normal good is so named because it represents the typical or normal situation for most goods. As such, when buyers have more income, then they tend to increase their purchases of normal goods.
Depends on the SituationClassifying a good as normal or inferior is not an intrinsic characteristic of a good itself, but depends on the situation of the buyer. A particular good might be inferior for one buyer and normal for another.
Consider a good such as cable television.
- Inferior Good: A buyer with a great deal of income, such as the truly wealthy, might view cable television as an inferior good. An increase in income probably induces a decline in cable television services, as the buyer opts for live entertainment, satellite television, and other more expensive, but more preferred alternatives.
- Normal Good: A buyer lower down the income spectrum probably views cable television as a normal good. An increase in income likely triggers a proportional increase in cable television services, such as moving from basic cable to digital cable.
Income ElasticityClassifying a good as inferior is accomplished in a precise manner using the income elasticity of demand. The income elasticity of demand is the relative response of demand to changes in income. More specifically, it is the percentage change in demand due to a percentage change in buyers' income. An inferior good is then one with an income elasticity that is negative, or less than zero. In comparison, a normal good has a positive income elasticity, or greater than zero.
INFERIOR GOOD, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 21, 2024].
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