Question

essay form

Explain how the concept of “inferior” goods and “normal” goods operate in a household when income increases

Briefly explain what is meant by the term “fixed costs” and provide three examples of same.

Briefly explain what is meant by the tern “variable cost” and provide three examples of same.

Answer 1

Inferior good

An inferior good describes a good whose demand drops when people's income increase. This occurs when a good has more costly substitutes that see an increase in demand as income and the economy improve.

The demand for inferior goods decreases as income increase or the economy improves. When this happens consumers will be more willing to spend on more costly substitutes.

Examples : hamburger, instant noodles, and canned goods.

When people have lower income, they tend to buy these kinds of products. But when their income increase, they often give these up to for more expensive items.

A normal good sees an increase in demand when income increase. Normal goods are also called necessary goods. A normal good is a good that experiences an increase in its demand due to increase in consumers income. A normal goods has an elastic relationship between income and demand for the good, changes in demand and income are positively correlated or move in the same direction.

Example :food staples, household appliances and clothing.

When income increase, household will demand a higher quantity of normal goods, but a lower quantity of inferior goods.

Fixed costs

A fixed cost is a cost that does not change with an increase or decrease in the amount of goods or services produced or sold.

Example: property taxes, depreciation and insurance.

Variable costs

Variable costs are that change as the quantity of good or service that a business produces changes.

Examples : labor, packaging, commissions and raw materials for production.