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Analyze how changes in consumer income and the prices of related goods impact the demand for a specific product.
Why does a 10% raise at work lead you to stop buying instant noodles entirely, while your demand for organic kale skyrockets? The secret lies in how your brain—and your budget—redefines 'value' when the world around you changes.
Quick Check
If a good has a YED of -0.5, what happens to demand when income increases?
Answer
Demand decreases because the good is an inferior good.
Quick Check
If the XED between butter and margarine is +1.2, are they substitutes or complements?
Answer
They are substitutes because the XED is positive.
It is not just about the sign; the magnitude matters. A high absolute value (e.g., ) suggests a very strong relationship. Firms use this to predict market shifts. During an economic recession (falling income), a firm selling inferior goods () might actually see profits rise. Conversely, if a competitor drops their price, a firm with high positive must react quickly or lose significant market share. Understanding these elasticities allows for predictive modeling of the demand curve's position.
An economy enters a recession, and average income falls by . A company sells 'Budget Beans' () and 'Premium Coffee' (). 1. Predict 'Budget Beans': . Demand increases. 2. Predict 'Premium Coffee': . Demand decreases sharply. 3. Strategy: The firm should shift marketing budget toward 'Budget Beans' to offset losses in the coffee segment.
If , the good is classified as a:
The price of Good X rises by and the demand for Good Y rises by . The XED is:
A good with a YED of -2.0 will see a decrease in demand during an economic boom.
Review Tomorrow
In 24 hours, try to recall the specific signs (positive/negative) for YED and XED and what they represent for consumer behavior.
Practice Activity
Look at three items in your room. Categorize them as normal or inferior, then identify one complement and one substitute for each.