Marketing Economy

Using diagrammatic analysis and appropriate examples describe and explain the following the effect of each of the following:

a) An increase in income on the consumption of a normal good

b) An increase in income on the consumption of an inferior good

c) A fall in the relative price of a good on the consumption of another complementary good

d) A fall in the relative price of a good on the consumption o another substitute good

A) An increase in consumption o a normal good

A normal good is a good such as new clothes, for which demand increases, or shits rightwards when there is an increase in consumer’s income.

When the consumers incomes increases the respond by buying more of both the products so the buy more pizza and Coke.

an increase in income will increase the market demand as more willing and able to buy more pizza.

If income increases then some consumers will be willing to buy more pizza at each price so market demand increases, resulting in the demand curve shifting rightwards.

B) An increase in income on the consumption of an inferior good

An inferior good is a good such as used clothes or which demand decreases or shits leftwards as consumer income rises.

Here Pepsi is an inferior good, when consumer’s income increases and the budget constraint shifts outwards the consumer buys more pizza and less Pepsi.

When market demand or new clothes will decrease when income increases.

The demand decreases when there is an increase in income. This is because people will tend to stop consuming inferior goods such as used clothes and start consuming normal goods and start consuming normal goods such as new clothes because they are more willing to be able to.

C) A fall in the relative price of a good on the consumption of another complementary good

Complement goods are goods such as milk and cookies, they are related in such away that an increase in the price o one shits the demand curve leftward.

Coke is reduces on price so the consumer has more money to spend on both the goods even when receiving the same amount o money.

A price fall in Coke shits the demand curve or pizza rightward. The goods complement each other so are consumed together therefore a price decrease in one will in crease demand or the other.

D) A fall in the relative price of a good on the consumption o another substitute good

Goods