Question

1 What is a normal good? Give an example. What would happen to a normal good if income increased for buyers? What is an inferior good?

2. What is consumer surplus? What is producer surplus? Explain in your own words what the terms mean and how they apply to you.

Answer 1

1. Normal good is a good who has positive income effect. Increase in income of consumer increases the demand for normal good and vice-versa.

Inferior goods is a good who has negative income effect. Increase in income of consumer decreases the demand for inferior good and vice-versa.

2. Consumer surplus is the difference between the price consumer is wiling to pay for the good and the actual price of the good. Demand curve shows the price consumer is willing to pay for a good so consumer surplus is the area below the demand curve and above the equilibrium price.

Producer surplus is the difference between actual price of the good and the price at which seller is willing to sell their goods. Supply curve shows the price at which seller is willing to sell their good so producer surplus is the area below market price and above supply curve.