Question

Compare and contrast “public goods”, “private goods”, normal goods and inferior goods, substitutes and complementary goods.

Answer 1

Difference between public goods and private goods.

Public goods are collectively owned and consumed but private goods are privately owned and consumed.

Public goods are provided by the government but private goods are provided by private firms.

Public goods are non-rival and non-excludable in consumption. But in private goods are rival and excludable in consumption.

In consumption of public goods the rich and poor treated equally. But private goods give preference to the rich.

Difference between normal goods and inferior goods.

For a normal good the income elasticity of demand is positive. An increase in consumers’ income leads to an increase in demand. But for inferior goods the income elasticity of demand to is negative. An increase in consumers’ income leads to fall in demand.

The income elasticity of demand for normal goods is positive but less than one. But the income elasticity of demand for inferior good is negative or less than zero.

When the income increase the demand curve of normal goods shift to the right. But when the income increases the demand curve for inferior goods shift to the left.

For normal goods the income demand relation is positive whereas in case of inferior goods the income demand relation is negative.

Difference between substituted goods and complementary goods.

Substituted goods are independent in consumption. A consumer can use one in place of other to satisfy his want. But the complementary goods are inter-dependent in consumption. The consumer cannot exclude one of them while satisfying his want.

When the price of a substituted goods increase the demand for other increase. But when the price of one complementary goods increase the demand for the other is also decrease.

The cross price elasticity of demand between the substituted goods is positive but the cross price elasticity of demand between complementary good is negative.

In case of substituted goods the consumers can switch their consumption from one to another. But in case of complementary goods the consumer cannot switch their consumption from one to another as they are jointly consumed.