2.7:
Effect of Income on Demand Curve: Normal Goods and Luxury Goods
Normal goods are products whose demand increases as consumer income rises and decreases when income falls.
Consider smartphones as an example.
As people's incomes increase, they tend to spend more on smartphones, opting for better models or additional features, which causes rightward shift in the demand curve.
Conversely, during periods of reduced income, individuals might postpone or scale back smartphone upgrades, leading to a leftward shift in the demand curve.
Luxury goods are products that see an even more pronounced shift in demand with income changes compared to normal goods.
Examples of luxury goods include luxury vehicles, designer clothing, and gourmet dining experiences.
When incomes rise, consumers often spend more on these goods, seeking to enjoy the prestige and quality they offer. This demand increase causes a significant rightward shift in their demand curve, often steeper than normal goods.
However, luxury goods are frequently the first to be cut from spending in periods of reduced income, resulting in a steep leftward shift in the demand curve.
2.7 Effect of Income on Demand Curve: Normal Goods and Luxury Goods
The relationship between consumer behavior and income is often illustrated through the concepts of "normal goods" and "luxury goods," which describe how demand for certain products fluctuates with changes in income.
Normal Goods: Consider the case of organic food. As consumers' incomes increase, they tend to spend more on organic foods due to their perceived health benefits and higher quality. This causes the demand curve to shift to the right. Conversely, during an economic downturns or personal financial strain, consumers may switch to cheaper, non-organic alternatives, leading to a leftward shift in the demand curve.
Luxury Goods: An example is the luxury yacht industry. The demand for luxury yachts significantly increases when consumer income rises, which results in a steep rightward shift in the demand curve. Conversely, during periods of reduced income, spending on such high-end goods is often the first to be curtailed, causing a sharp leftward shift in the demand curve.
Understanding normal and luxury goods provides valuable insights into how income changes affect consumer spending patterns. This knowledge is essential for businesses to formulate effective marketing strategies and for policymakers to understand economic trends.