Normal and Inferior Goods Economists classify a good as either normal or inferior,

depending on whether consumers spend more or less on that good as their income increases.

Normal goods are those that people buy more of as their income increases.

Inferior goods are those that people buy less of as their income increases.

Luxury Goods are very expensive normal goods. We demand more of as our income increases, vice versa. I.e. We will buy more luxury items like a boat as our income increases. A luxury good is a sub set of normal goods.

Normal or Inferior?

Normal or Inferior?

Normal or Inferior?

Normal or Inferior?

Normal or Inferior?

Normal or Inferior?

Household income Household income and Consumption and Consumption PatternsPatterns

WALT: Explain relationships WALT: Explain relationships between household income between household income and consumption patterns. and consumption patterns.

A household: Group of consumers who live A household: Group of consumers who live under one roof. May consist of an individual, under one roof. May consist of an individual, couples parents their children family friends or couples parents their children family friends or flatmates. flatmates.

The level of income a householdThe level of income a household earns has an effect on our demand. earns has an effect on our demand.

As income changes our spending patterns changeAs income changes our spending patterns change

Aggregate household Aggregate household spendingspending

When we add all households together we call it When we add all households together we call it aggregate.aggregate.

Spending patterns can be broken down into 4 Spending patterns can be broken down into 4 groupsgroups

1. Necessities. e.g food, clothing, shelter1. Necessities. e.g food, clothing, shelter 2. Basic services and wants e.g transport2. Basic services and wants e.g transport 3. Luxuries and other services e.g meals out3. Luxuries and other services e.g meals out 4. Savings4. Savings

Income and Consumption Income and Consumption patternspatterns

When we earn an income the first thing we do is spend our When we earn an income the first thing we do is spend our disposable income on necessities.disposable income on necessities.

At lower income levels, there may be little disposable At lower income levels, there may be little disposable income left over after the basic needs have been paid for. income left over after the basic needs have been paid for.

Paying for necessities will take up a larger proportion of Paying for necessities will take up a larger proportion of our disposable income for low income levels.our disposable income for low income levels.

Income and Consumption Income and Consumption patternspatterns

As our disposable income increases we As our disposable income increases we may decide to demand less inferior may decide to demand less inferior goods and instead buy more better goods and instead buy more better quality goods. quality goods.

Income and Consumption Income and Consumption patternspatterns

A household has only so many needs. Once out needs and A household has only so many needs. Once out needs and basic wants are satisfied then the demand for luxury goods basic wants are satisfied then the demand for luxury goods increases. increases.

As we earn more income we are able to afford luxury items As we earn more income we are able to afford luxury items such as cellfones, going to the movies HD TVs going on such as cellfones, going to the movies HD TVs going on overseas holiday etc. Luxury goods are certainly not essential overseas holiday etc. Luxury goods are certainly not essential for our survival.for our survival.

Income and Consumption Income and Consumption patternspatterns

At higher levels of income we begin to At higher levels of income we begin to spend more on luxury goods. However the spend more on luxury goods. However the amount of income spent on necessities will amount of income spent on necessities will still be the same still be the same

BUT the proportion of total income spent on BUT the proportion of total income spent on necessities begins to fall and the proportion necessities begins to fall and the proportion spent on luxury goods starts to increase. spent on luxury goods starts to increase.

SavingsSavings Savings= Proportion of income not spent. Savings= Proportion of income not spent.

As our incomes increase the proportion As our incomes increase the proportion of income that may be saved will of income that may be saved will increase. increase.

Aggregate patterns of Aggregate patterns of household spendinghousehold spending

At low incomes most At low incomes most money is spent on necessitiesmoney is spent on necessities

As income increases the amount spent As income increases the amount spent on necessities does not increase greatly on necessities does not increase greatly but more basic necessities and wants but more basic necessities and wants can be purchasedcan be purchased

Luxuries can only be afforded by those Luxuries can only be afforded by those with higher incomeswith higher incomes

Savings occur at higher levels of income Savings occur at higher levels of income because at these income levels people because at these income levels people do not spend all that they earn. do not spend all that they earn.

Expenditure (spending)

Income

luxuries

savings

Necessities

Basic wants and services

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