In an introductory economics course, students will often be asked to differentiate between inferior and normal goods.

This guide hopes to illuminate the differences between the two types of goods. Normal Good: For most items, having a higher income would result in you consuming more of those items. Consider, for example, filet mignon. If you have more income (and you aren't a vegetarian), you will end up consuming more filet mignons that you would with a lower income. In other words, quantity demanded rises as incomes rise. There is a positive association between quantity demanded and income. This can also be said as having a positive income elasticity of demand. Inferior Good: Now, consider an inferior good. These goods are not of poorer quality than other goods, as is suggested by the adjective "inferior." Instead, they are simply goods that you consume less of if your income rises. Consider, for example, ramen noodles. People with lower incomes (such as college students) will probably consumer more ramen noodles than they would if their incomes started to rise to a level where they could afford more expensive and more wholesome food. Thus, ramen noodles are an inferior good. In other words, quantity demanded of ramen noodles falls as incomes rise. There is a negative association between quantity demanded and income. This can also be said as having a negative income elasticity of demand

Normal and Inferior Goods and Its Examples

Normal goods can be defined as those goods for which demand increases when the income of the consumer increases and falls when income of theconsumer decreases, price of the goods remaining constant. Examples of normal goods are demand of LCD and plasma television, demand for more expensive cars, branded clothes, expensive houses, diamonds etc increases when the income of the consumers increases. To the opposite side of normal goods are the inferior goods. It is defined as those goods the demand for which decreases when the income of theconsumer increases. Examples of inferior goods are consumption of breads or cereals and since the income of the consumer increases he moved towards consumption of more nutritious foods and hence demand for low priced product like bread or cereal decreases. Another example can be of use of public transportation, when income is low people use more of public transportation which is not the case when their income increases. Hence from the above one can see that other things remaining constant as the income of consumer increases demand for normal goods will increase and demand for inferior goods decrease and vice versa.

Measurement of Price Elasticity of Demand:

There are three methods of measuring price elasticity of demand: (1) Total Expenditure Method. (2) Geometrical Method or Point Elasticity Method. (3) Arc Method.

These three methods are now discussed in brief:

(1) Total Expenditure Method/Total Revenue Method:

Definition, Schedule and Diagram:
The price elasticity can be measured by noting the changes in total expenditure brought about by changes in price and quantity demanded. (i) When with a percentage fall in price, the quantity demanded increases so much that it results in the increase in total expenditure, the demand is said to be elastic (Ed > 1).

For Example:
Price Per Unit ($) 20 10 Quantity Demanded 10 Pens 30 Pens Total Expenditure ($) 200.0 300.0

The figure (6.6) shows that at price of $20 per pen, the quantity demanded is ten pens, the total expenditure OABC ($200). When the price falls down to $10, the quantity demanded of pens is thirty. The total expenditure is OEFG ($300). Since OEFG is greater than OABC, it implies that change in quantity demanded is proportionately more than the change in price. Hence the demand is elastic (more than one) Ed > 1. (ii) When a percentage fall in price raises the quantity demanded so much as to leave the total expenditure unchanged, the elasticity of demand is said to be

unitary (Ed = 1).

For Example:
Price Per Pen ($) 10 5 Quantity Demanded 30 60 Total Expenditure ($) 300 300

The figure (6.7) shows that at price of $10 per pen, the total expenditure is OABC ($300). At a lower price of $5, the total expenditure is OEFG ($300). Since OABC = OEFG, it implies that the change in quantity demanded is proportionately equal to change in price. So the price elasticity of demand is equal to one, i.e., Ed = 1. (iii) When a percentage fall in price raises the quantity demanded of a good so as to cause the total expenditure to decrease, the demand is said to be inelastic or less than one, i.e., Ed < 1.

For Example:
Price Per Pen ($) 5 2 Quantity Demanded 60 100 Total Expenditure ($) 300 200

In the fig (6.8) at a price of $5 per pen the quantity demanded is 50 pens. The total expenditure is OABC ($300). At a lower price of $2, the quantity demanded is 100 pens. The total expenditure is OEFG ($200). Since OEFG is smaller than OABC, this implies that the change in quantity demanded is proportionately less than the change in price. Hence price elasticity of demand is less than one or inelastic. Note: As the demand curve slopes downward, therefore, the coefficient of price elasticity of demand is always negative. The economists for convenience sake, omit the negative sign and express the price elasticity of demand by positive number.

(2) Geometric Method/Point Elasticity Method:

"The measurement of elasticity at a point of the demand curve is called point elasticity". The point elasticity of demand method is used as a measure of the change in the quantity demanded in response to a very small changes in price. The point elasticity of demand is defined as: "The proportionate change in the quantity demanded resulting from a very small proportionate change in price".

Measurement of Geometric/Point Elasticity Method:

(i) Measurement of Elasticity on a Linear Demand Curve: The price elasticity of demand can also be measured at any point on the demand curve. If the demand curve is linear (straight line), it has a unitary elasticity at the mid point. The total revenue is maximum at this point.

Any point above the midpoint has an elasticity greater than 1, (Ed > 1). Here, price reduction leads to an increase in the total revenue (expenditure). Below the midpoint elasticity is less than 1. (E d < 1). Price reduction leads to reduction in the total revenue of the firm. Graph/Diagram:

The formula applied for measuring the elasticity at any point on the straight line demand curve is:

Ed =

%q X
%p

p
q

The elasticity at each point on the demand curve can be traced with the help of point method as: Ed = Lower Segment Upper Segment In the figure (6.9) AG is the linear demand curve (1). Elasticity of demand at its mid point D is equal to unity. At any point to the right of D, the elasticity is less than unity (Ed < 1) and to the left of D, the elasticity is greater than unity (Ed > 1). (1) Elasticity of demand at point D = DG = 400 = 1 (Unity). DA 400 (2) Elasticity of demand at point E = GE = 200 = 0.33 (<1). EA 600 (3) Elasticity of Demand at point C = GC = 600 = 3 (>1). CA 200

(4) Elasticity of Demand at point C is infinity. (5) At point G, the elasticity of demand is zero. Summing up, the elasticity of demand is different at each point along a linear demand curve. At high prices, demand is elastic. At low prices, it is inelastic. At the midpoint, it is unit elastic. (ii) Measurement of Elasticity on a Non Linear Demand Curve: If the demand curve is non linear, then elasticity at a point can be measured by drawing a tangent at the particular point. This is explained with the help of a figure given below:

In figure 6.10, the elasticity on DD demand curve is measured at point C by drawing a tangent. At point C: Ed = BM = BC = 400 = 2 (>1). MO CA 200 Here elasticity is greater than unity. Point C lies above the midpoint of the demand curve DD . In case the demand curve is a rectangular hyperbola, the change in price will have no effect on the total amount spent on the product. As such, the demand curve will have a unitary elasticity at all points.
/

(3) Arc Elasticity:

Normally the elasticity varies along the length of the demand curve. If we are to measure elasticity between any two points on the demand curve, then the Arc Elasticity Method, is used. Arc elasticity is a measure of average elasticity between any two points on the demand curve. It is defined as: "The average elasticity of a range of points on a demand curve".

Formula:
Arc elasticity is calculated by using the following formula:

Ed = q X P + P 1 2 p q + q Here: q denotes change in quantity. p denotes change in price. q signifies initial quantity. q denotes new quantity. P stands for initial price. P denotes new price.
2 1 2 1

Graphic Presentation of Measuring Elasticity Using the Arc Method:

In this fig. (6.11), it is shown that at a price of $10, the quantity of demanded of apples is 5 kg. per day. When its price falls from $10 to $5, the quantity demanded increases to 12 Kgs of apples per day. The / arc elasticity of AB part of demand curve DD can be calculated as under: Ed = q X P + P 1 2 p q + q Ed = 7 X 10 + 5 = 7 X 15 = 7 X 15 = 21 = 1.23 5 5 + 12 5 17 5 17 17 The arc elasticity is more than unity.
1 2

Types of Elasticity of Demand:

The quantity of a commodity demanded per unit of time depends upon various factors such as the price of a commodity, the money income of the prices of related goods, the tastes of the people, etc., etc. Whenever there is a change in any of the variables stated above, it brings about a change in the quantity of the commodity purchased over a specified period of time. The elasticity of demand measures the responsiveness of quantity demanded to a change in any one of the above factors by keeping other factors constant. When the relative responsiveness or sensitiveness of the quantity demanded is measured to changes, in its price, the elasticity is said be price elasticity of demand. When the change in demand is the result of the given change in income, it is named as income elasticity of demand. Sometimes, a change in the price of one good causes a change in the demand for the other. The elasticity here is called cross electricity of demand. The three main types of elasticity of demand are now discussed in brief.

(1) Price Elasticity of Demand:

Definition and Explanation:
The concept of price elasticity of demand is commonly used in economic literature. Price elasticity of demand is the degree of responsiveness of quantity demanded of a good to a change in its price. Precisely, it is defined as: "The ratio of proportionate change in the quantity demanded of a good caused by a given proportionate change in price".

Formula:
The formula for measuring price elasticity of demand is: Price Elasticity of Demand = Percentage in Quantity Demand Percentage Change in Price Ed = q X P p Q

Example:
Let us suppose that price of a good falls from $10 per unit to $9 per unit in a day. The decline in price causes the quantity of the good demanded to increase from 125 units to 150 units per day. The price elasticity using the simplified formula will be: Ed = q X P p Q q = 150 - 125 = 25

p = 10 - 9 = 1 Original Quantity = 125 Original Price = 10 Ed = 25 / 1 x 10 / 125 = 2 The elasticity coefficient is greater than one. Therefore the demand for the good is elastic.

Types:
The concept of price elasticity of demand can be used to divide the goods in to three groups. (i) Elastic. When the percent change in quantity of a good is greater than the percent change in its price, the demand is said to be elastic. When elasticity of demand is greater than one, a fall in price increases the total revenue (expenditure) and a rise in price lowers the total revenue (expenditure). (ii) Unitary Elasticity. When the percentage change in the quantity of a good demanded equals percentage in its price, the price elasticity of demand is said to have unitary elasticity. When elasticity of demand is equal to one or unitary, a rise or fall in price leaves total revenue unchanged. (iii) Inelastic. When the percent change in quantity of a good demanded is less than the percentage change in its price, the demand is called inelastic. When elasticity of demand is inelastic or less than one, a fall in price decreases total revenue and a rise in its price increases total revenue.

(2) Income Elasticity of Demand:

Definition and Explanation:
Income is an important variable affecting the demand for a good. When there is a change in the level of income of a consumer, there is a change in the quantity demanded of a good, other factors remaining the same. The degree of change or responsiveness of quantity demanded of a good to a change in the income of a consumer is called income elasticity of demand. Income elasticity of demand can be defined as: "The ratio of percentage change in the quantity of a good purchased, per unit of time to a percentage change in the income of a consumer".

Formula:
The formula for measuring the income elasticity of demand is the percentage change in demand for a good divided by the percentage change in income. Putting this in symbol gives.

Ey = Percentage Change in Demand Percentage Change in Income

Simplified formula: Ey = q X P p Q

Example:
A simple example will show how income elasticity of demand can be calculated. Let us assume that the income of a person is $4000 per month and he purchases six CD's per month. Let us assume that the monthly income of the consumer increase to $6000 and the quantity demanded of CD's per month rises to eight. The elasticity of demand for CD's will be calculated as under: q = 8 - 6 = 2 p = $6000 - $4000 = $2000 Original quantity demanded = 6 Original income = $4000 Ey = q / p x P / Q = 2 / 200 x 4000 / 6 = 0.66 The income elasticity is 0.66 which is less than one.

Types:
When the income of a person increases, his demand for goods also changes depending upon whether the good is a normal good or an inferior good. For normal goods, the value of elasticity is greater than zero but less than one. Goods with an income elasticity of less than 1 are called inferior goods. For example, people buy more food as their income rises but the % increase in its demand is less than the % increase in income.

(3) Cross Elasticity of Demand:

Definition and Explanation:
The concept of cross elasticity of demand is used for measuring the responsiveness of quantity demanded of a good to changes in the price of related goods. Cross elasticity of demand is defined as: "The percentage change in the demand of one good as a result of the percentage change in the price of another good".

Formula:
The formula for measuring, cross, elasticity of demand is: Exy = % Change in Quantity Demanded of Good X % Change in Price of Good Y

The numerical value of cross elasticity depends on whether the two goods in question are substitutes, complements or unrelated.

Types and Example:

(i) Substitute Goods. When two goods are substitute of each other, such as coke and Pepsi, an increase in the price of one good will lead to an increase in demand for the other good. The numerical value of goods is positive. For example there are two goods. Coke and Pepsi which are close substitutes. If there is increase in the price of Pepsi called good y by 10% and it increases the demand for Coke called good X by 5%, the cross elasticity of demand would be: Exy = %qx / %py = 0.2 Since Exy is positive (E > 0), therefore, Coke and Pepsi are close substitutes. (ii) Complementary Goods. However, in case of complementary goods such as car and petrol, cricket bat and ball, a rise in the price of one good say cricket bat by 7% will bring a fall in the demand for the balls (say by 6%). The cross elasticity of demand which are complementary to each other is, therefore, 6% / 7% = 0.85 (negative). (iii) Unrelated Goods. The two goods which a re unrelated to each other, say apples and pens, if the price of apple rises in the market, it is unlikely to result in a change in quantity demanded of pens. The elasticity is zero of unrelated goods.