Demand and Supply - Demand Shift pg-5

Taste changes are not the only reason demand curves shift. Income changes are a frequent cause of demand changes. You might think that the effect of a change in income is obvious. After all, if you have more money to spend you would buy more stuff and if your income falls, you'd buy less stuff. It is certainly true that one can spend more if income rises and less if it falls, but we shall see that it still is the case that demand for some goods will rise when income falls and vice versa.

When income rises it is normal to spend more on things like movies, music, clothes, vacations, dining out, new cars and so on. Are there things you'd buy less of as your income rises? In most cases, the answer is yes. For instance, if earning a higher income leads you to dine out more, it stands to reason that you would buy less food to prepare at home and spend less on having prepared food delivered. If you buy a new car, you would probably spend less money on car repairs (you hope!). College students short on funds often report dining on things like ramen noodles and macaroni and cheese and look forward to the day when their incomes increase to the point where they can stop buying these items.

By now it should be clear that if we are asked to predict whether an increase in income will lead to a shift out or shift back in demand for a particular good or service the answer would have to be it all depends.21 Fortunately, we know on what it depends.

Our discussion above should make it clear that when we speak of income changes, goods and services can be thought of as being divided into two classes: those goods for which demand increases when income increases, or normal goods, and those goods for which demand decreases as income increases, or inferior goods.

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It all depends, is a handy phrase to keep in your economist tool kit. Economists are often asked to speculate without all the relevant information. In such cases, it all depends is an excellent phrase with which to begin your answer.

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