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What I want to do in this video

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is think about the demand curve

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for two different products.

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So this is some laptop

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that's on the market.

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And this, let's just say,

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is the cheapest car

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that happens to be on the market

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this is actually a picture of a 1985

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assuming this is the cheapest car on the market.

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So let's just think about

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their hypothetical demand curves right now

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So once again, on the vertical axis,

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we're going to put price,

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and on the horizontal axis,

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we put quantity,

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and then over here

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let me do it for the same thing

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So this is price,

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and this right over here is quantity.

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And both of them satisfy the law of demand

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if the price is really high

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the quantity demanded is going to be really low for the laptop

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and so it might be right over there

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and if the price is low

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the quantity demanded is going to increase.

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So, the demand curve might look something like that.

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And it doesn't have to be a curve,

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or doesn't have to be a line,

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it could be a curve or anything like that.

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So that is the current demand for the laptop

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All else equal,

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so we're not talking about shifting any of those other factors

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that we've been talking about in the last few videos.

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Now we can draw a similar demand curve

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for this very cheap automobile.

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If the price is high,

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very few people are going to want to buy it,

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and I'm not going to specify what the price is,

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but this is a general idea

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if the price is higher,

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fewer people are going to want to buy it

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If the price is lower,

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more people are going to want to buy it

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So this demand curve will also have the same shape

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from the top left to the bottom right

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it satisfies the law of demand.

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So once again, that is the current demand.

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Now let's think about

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how the demand for each of these goods might change

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depending on changes in income.

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So we're going to focus on the income factor

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the income effect, for this video

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and see how these 2 products might change.

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So let's just assume that

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income in the general population goes up.

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So for something like a laptop, wow,

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if more people are making more money

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especially in real terms

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they have more money to spend well

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for any given price point,

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at any given price point,

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there's going to be a higher quantity

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that's demanded.

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At any given price point,

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higher quantity demanded.

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And so if income goes up for this laptop,

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the demand will increase.

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And the way we show demand increasing

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is the whole curve shifts to the right

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so this right over here demand increased

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demand went up when income went up.

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And this makes complete sense

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and if income were to go down,

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demand would go down

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because people would have less money

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to buy something like a laptop.

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And this is the case for most goods

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we call things like this,

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when income goes up, demand goes up,

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whole curve shifts to the right

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income goes down, demand goes down,

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whole curve shifts to the left

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We call this a normal good.

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So this right over here is a normal good.

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Now let's think about

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what happens with the cheapest car on the market.

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And let's assume we're in a developed country

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where almost everyone has some form of a car.

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Now, what happens when income goes up?

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So people have more money

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but are they going to spend that money

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buying the cheapest car on the market?

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Well, in most cases, if income goes up generally,

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people say, well I have a little bit more money,

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maybe I'll buy a slightly nicer car.

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So, and maybe in particular

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the people who were going to buy this car

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at any given price point

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So this price point,

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the people who were going to buy the car will say

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Wait! I can now afford a better car!

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Why should I you know,

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this is not safe

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maybe or not as safe as the other cars,

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and I want to impress my friends

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from high school and all that,

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so something very strange might happen for this car,

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the demand for this car.

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It actually will decrease

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so the whole curve could shift to the left.

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So income is a very strange thing for this good

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because income increasing maybe people say,

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hey you know what,

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I could trade out of this good

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I could get a good that

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I'd rather have than just getting more of this thing right over here

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Demand went down.

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And goods like this, we call them inferior goods.

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And the general way to think about

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inferior goods are the goods

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that people will want to not own if they had more money

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they would want to buy, I guess, less inferior goods.

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Or another way to think about it is,

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if income were to go down,

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and more people are budget strapped

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and they can't afford

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the Mercedes-Benz or the BMW

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or even the mid-sized sedan anymore,

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so if income were to go down

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and things were getting tighter,

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more people would want this car

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more people would have to trade down to this

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because they're strapped,

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they're tightening their belts

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and so you'll have this strange situation

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where if income goes down,

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demand would go up for this thing

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So income goes down,

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demand goes up.

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Remember, we're talking about demand,

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we're talking about the entire shifting of the curve.


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At any given price point,

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the quantity demanded will go up.

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Because, this is, or we're assuming,

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is the cheapest car on the market.

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So, and likewise,

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if income were to go down for a normal good,

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it'll do what you'll expect,

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demand would go down.

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So this, an inferior good,

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does the opposite of a normal good

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when we're talking about the income effect,

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the inferior good will do the opposite of a normal good

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and that's because people want to trade out of it

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when their income goes up

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or they don't want to buy it

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or they want to buy something nicer.

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And when their income goes down,

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they'll say

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I have to buy this thing,

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so you know, let me just do it.