Question

Income Elasticity of Demand characterizes how the demand for a good changes when consumer or customer income changes. This responsiveness to income also tells you whether the good in question is considered to be a normal good, or an inferior good.

1. Firstly, define what exactly we mean in economics by a normal good and an inferior good?

2. In two different articles in the 90’s some economists estimated the following income elasticities of demand for three goods. Based on the estimates below, which goods are “normal” and which ones are inferior? [2.5pts]

Goods/Services	Income Elasticity
Transportation	1.80
Food	0.80
Ground beef, nonfed	-1.94

3. Now assume that you won the lottery big time, and that your buddies talked you into buying a meat processing plant that turns non-fed cattle into ground beef to supply the Rocky Mountain region. Turns out this plant supplies Papa John’s pizza chains, and your buddies think Peyton Manning is a good enough reason to invest in anything.

4. While reading the WSJ you notice a number of articles estimating that consumer incomes are expected to rise 7% percent within the Rocky Mountain region. Based on the Income elasticity of ground beef, what might you estimate for the change in demand for beef at your new meat processing plant?

Answer 1

In Economics normal goods are those goods which have a positive relation between the quantity demanded and the income of the consumer. That means when income of the consumer increases then the demand for normal goods are also increased. An inferior good is just opposite to the normal good. When income of the consumer increases then the demand for inferior good decreased. Because the consumer have more income so she or he opted for normal goods and better goods than inferior good. If the consumer have less income then he or she can't able to afford normal good. So they demanded inferior good which have less price than normal good.

When the good have positive income elasticity of demand then the good is normal good. Positive income elasticity of demand means when income increases demand for that good also increased. So in the case of normal good when income increases the demand for the good also increased. When the income elasticity of demand is negative then the good is inferior good. Because the negative income elasticity of demand means the increase in income leads to a decrease in demand of the good. The demand for an inferior good decreased when the income increased. So the good transportation and food are normal goods. The ground beef,non fed are inferior good.

Based on the income elasticity of ground beef, the decision for investment in meat processing plant that turns non fed cattle into ground beef is not good in the Rocky Mountain region. Because many studies assumes that the income of the consumers in Rocky Mountain region will increase. When the income of the consumer increases they choose for more normal goods and for luxury goods. Income elasticity of demand shows the responsiveness of demand on change in income. So when the income elasticity is negative that shows that an increase in income of the consumer reduces the demand for that good. The inferior good have negative income elasticity. Then the demand for inferior good reduced when the income of the consumer increases. In the Rocky Mountain region the income of the consumer is expected to rise and the ground beef have a negative income elasticity. Then the increase in income reduces the demand for ground beef. So in future there is a possibility for increase in income and thereby a reduction in demand for ground beef. So the investment on meat processing plant is non profitable to the investor.