What I want to do in this video

is think about the demand curve

for two different products.

So this is some laptop

that's on the market.

And this, let's just say,

is the cheapest car

that happens to be on the market

this is actually a picture of a 1985

assuming this is the cheapest car on the market.

So let's just think about

their hypothetical demand curves right now

So once again, on the vertical axis,

we're going to put price,

and on the horizontal axis,

we put quantity,

and then over here

let me do it for the same thing

So this is price,

and this right over here is quantity.

And both of them satisfy the law of demand

if the price is really high

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

and so it might be right over there

and if the price is low

the quantity demanded is going to increase.

So, the demand curve might look something like that.

And it doesn't have to be a curve,

or doesn't have to be a line,

it could be a curve or anything like that.

So that is the current demand for the laptop

All else equal,

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

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

Now we can draw a similar demand curve

for this very cheap automobile.

If the price is high,

very few people are going to want to buy it,

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

but this is a general idea

if the price is higher,

fewer people are going to want to buy it

If the price is lower,

more people are going to want to buy it

So this demand curve will also have the same shape

from the top left to the bottom right

it satisfies the law of demand.

So once again, that is the current demand.

Now let's think about

how the demand for each of these goods might change

depending on changes in income.

So we're going to focus on the income factor

the income effect, for this video

and see how these 2 products might change.

So let's just assume that

income in the general population goes up.

So for something like a laptop, wow,

if more people are making more money

especially in real terms

they have more money to spend well

for any given price point,

at any given price point,

there's going to be a higher quantity

that's demanded.

At any given price point,

higher quantity demanded.

And so if income goes up for this laptop,

the demand will increase.

And the way we show demand increasing

is the whole curve shifts to the right

so this right over here demand increased

demand went up when income went up.

And this makes complete sense

and if income were to go down,

demand would go down

because people would have less money

to buy something like a laptop.

And this is the case for most goods

we call things like this,

when income goes up, demand goes up,

whole curve shifts to the right

income goes down, demand goes down,

whole curve shifts to the left

We call this a normal good.

So this right over here is a normal good.

Now let's think about

what happens with the cheapest car on the market.

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

where almost everyone has some form of a car.

Now, what happens when income goes up?

So people have more money

but are they going to spend that money

buying the cheapest car on the market?

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

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

maybe I'll buy a slightly nicer car.

So, and maybe in particular

the people who were going to buy this car

at any given price point

So this price point,

the people who were going to buy the car will say

Wait! I can now afford a better car!

Why should I you know,

this is not safe

maybe or not as safe as the other cars,

and I want to impress my friends

from high school and all that,

so something very strange might happen for this car,

the demand for this car.

It actually will decrease

so the whole curve could shift to the left.

So income is a very strange thing for this good

because income increasing maybe people say,

hey you know what,

I could trade out of this good

I could get a good that

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

Demand went down.

And goods like this, we call them inferior goods.

And the general way to think about

inferior goods are the goods

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

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

Or another way to think about it is,

if income were to go down,

and more people are budget strapped

and they can't afford

the Mercedes-Benz or the BMW

or even the mid-sized sedan anymore,

so if income were to go down

and things were getting tighter,

more people would want this car

more people would have to trade down to this

because they're strapped,

they're tightening their belts

and so you'll have this strange situation

where if income goes down,

demand would go up for this thing

So income goes down,

demand goes up.

Remember, we're talking about demand,

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

At any given price point,

the quantity demanded will go up.

Because, this is, or we're assuming,

is the cheapest car on the market.

So, and likewise,

if income were to go down for a normal good,

it'll do what you'll expect,

demand would go down.

So this, an inferior good,

does the opposite of a normal good

when we're talking about the income effect,

the inferior good will do the opposite of a normal good

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

when their income goes up

or they don't want to buy it

or they want to buy something nicer.

And when their income goes down,

they'll say

I have to buy this thing,

so you know, let me just do it.