YIELD: The rate of return on a financial asset. In some simple cases, the yield on a financial asset, like commercial paper, corporate bond, or government security, is the asset's interest rate. However, as a more general rule, the yield includes both the interest earned from an asset plus any changes in the asset's price. Suppose, for example, that a $100,000 bond has a 10 percent interest rate, such that the holder receives $10,000 interest per year. If the price of the bond increases over the course of the year from $100,000 to $105,000, then the bond's yield is greater than 10 percent. It includes the $10,000 interest plus the $5,000 bump in the price, giving a yield of 15 percent. Because bonds and similar financial assets often have fixed interest payments, their prices and subsequently yields move up and down as economic conditions change.
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A good for which a change in income causes a comparable change in demand. That is, an increase in income causes an increase in demand and a decrease in income causes a decrease in demand. The income elasticity of demand for a normal good is positive. A normal good is one of two alternatives falling within the buyers' income demand determinant. The other is an inferior good. A normal good is a good that reacts positively to changes in buyers' income. If buyers have more income, then they purchase more of a normal good. If they have less income, then they reduce purchases of a normal good.
The Ability to BuyIncome is a critical factor affecting the ability to purchase a good. If buyers have more income, then they have a greater ability to purchase goods. The demand for most goods react in this positive manner to changes in buyers' income. This can even be considered the "normal" situation, which is why normal goods are termed normal goods.
Consider this illustration of a normal 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 housing, the best he could afford was a studio apartment with a scant 300 square feet of living space.
However, once Duncan worked his way up the occupational ladder and his income increased, he was inclined to demand more housing. He recently moved into a sprawling suburban residence with over 3000 square feet of living space. His demand for living space increased with his additional income and with his increased ability to buy. For most people, Like Duncan, housing is a normal good.
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 would be inclined to purchase less housing, perhaps a duplex with only 1000 square feet of living space.
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 living space 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 normal good.
- Increase in Income: An increase in buyers' income causes an increase in demand and a rightward shift of the demand curve for living space. Click the [Income Increase] button to demonstrate.
- Decrease in Income: A decrease in buyers' income causes a decrease in demand and a leftward shift of the demand curve for living space. Click the [Income Decrease] button to demonstrate.
An Inferior AlternativeThe alternative to a normal good is an inferior good. An inferior good exists if buyers are inclined to buy less of the good when they have more income. An inferior good 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, then they tend to reduce their purchases of inferior goods.
A Little LuxuryA special type of normal good is termed a luxury good, or superior good. A superior good is first and foremost a good which is positively related to income. However, a change in income causes a more than proportional change in demand for the good.
For example, a 10 percent increase in income results in a greater than 10 percent increase in the demand for a superior good. Alternatively, a 10 percent decrease in income results in a greater than 10 percent decrease in the demand.
Because the demand for superior goods tends to increase A LOT as buyers obtain extra income, they are also more commonly termed luxury goods.
Depends on the SituationClassifying a good as normal, inferior, or superior, is not an intrinsic characteristic of a good itself, but largely depends on the situation of the buyer. A particular good might be normal for one buyer, superior for another, and inferior for a third.
Consider a good such as cable television.
- Superior Good: A buyer with limited income, such as someone working at a minimum wage job, might view cable television as superior good. Demand for cable television is likely to increase substantially with an increase in income, that is, from no cable television to basic service.
- Normal Good: A buyer residing in the middle of 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.
- 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.
Income ElasticityClassifying a good as normal 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. A normal good is then one with an income elasticity that is positive, or greater than zero. In comparison, an inferior good has a negative income elasticity, or less than zero, and a superior good has a positive income elasticity that is greater than one.
NORMAL GOOD, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: March 4, 2024].
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