Principles of Microeconomics / Unit 5 MIC 0410 worked example, 60 to 90 seconds
Reading an Income Change
The idea
From a consumer's bundles before and after an income rise, classify each good. If the quantity rose, the good is normal for this consumer; if it fell, the good is inferior. Check the budget first: both bundles should exhaust their budgets at the same prices, which confirms that only income moved. Then compare quantities good by good, because one bundle can contain a normal good and an inferior good at once.
In practice
Worked example: with forty dollars, bus fares at two dollars and taxi rides at eight, a commuter takes twelve bus rides and two taxi rides, spending exactly forty. With eighty dollars she takes eight bus rides and eight taxi rides, spending exactly eighty. Bus rides fell as income rose, so they are inferior for her; taxi rides rose, so they are normal.
Where people slip
Inferior describes this consumer's response, not the good's quality, and it can reverse at other incomes. And do not infer the class from spending: bus spending fell here, but a good's spending can fall while its quantity rises if its price changed, which is why the prices are checked first.
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