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When a rise in income increases Why do we say “most goods,” rather than “all goods”? Most goods are normal
the demand for a good — the
normal case — it is a normal
good. When a rise in income
decreases the demand for a
good, it is an inferior good. to, people stop buying an inferior good and switch their consumption to the pre-
34 Macro • Unit 1 Basic Economic Concepts
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goods — the demand for them increases when consumer incomes rise. However, the
demand for some goods decreases when incomes rise — these goods are known as
inferior goods. Usually an inferior good is one that is considered less desirable than
more expensive alternatives — such as a bus ride versus a taxi ride. When they can afford
ferred, more expensive alternative. So when a good is inferior, a rise in income shifts the
demand curve to the left. And, not surprisingly, a fall in income shifts the demand curve
to the right.
Consider the difference between so-called casual-dining restaurants such as
Applebee’s and Olive Garden and fast-food chains such as McDonald’s and KFC.
When their incomes rise, Americans tend to eat out more at casual-dining restaurants.
However, some of this increased dining out comes at the expense of fast-food venues —
to some extent, people visit McDonald’s less once they can afford to move upscale. So
casual dining is a normal good, while fast food appears to be an inferior good.
Changes in the Number of Consumers (Buyers) A growing world population
increases the demand for most things, including fast food, clothing, and lumber. With
more people needing housing and furniture, the overall demand for lumber rises and
the lumber demand curve shifts to the right, even if each individual’s demand for lum-
ber remains unchanged. How the number of consumers affects the market demand
curve is described in detail shortly.
Changes in Expectations When consumers have some choice about when to make a
purchase, current demand for a good or service is often affected by expectations about
its future price. For example, savvy shoppers often wait for seasonal sales — say, buying
next year’s holiday gifts during the post-holiday markdowns. In this case, expectations
of a future drop in price lead to a decrease in demand today. Alternatively, expectations
of a future rise in price are likely to cause an increase in demand today. For example, if
you heard that the price of jeans would increase next year, you might go out and buy
an extra pair now.
Changes in expectations about future income can also lead to changes in demand.
If you learned today that you would inherit a large sum of money sometime in the
future, you might borrow some money today and increase your demand for certain
goods. Maybe you would buy more electronics, jewelry, or sports equipment. On the
other hand, if you learned that you would earn less in the future than you thought, you
might reduce your demand for those goods and save more money today. Consumption
smoothing of this type shifts your demand curves for those goods to the right when your
expected future income increases, and to the left when your expected future income
decreases. Your own demand curves for goods and services are known as individual
demand curves, which we’ll explore next.
Individual Versus Market demand Curves
We have discussed both the demand of individuals and the market demand for vari-
ous goods. Now let’s distinguish between an individual demand curve, which shows the
relationship between quantity demanded and price for an individual consumer, and a
market demand curve, which shows the combined demand by all consumers. Suppose
that Darla is a consumer of blue jeans. Also suppose that all blue jeans are the same,
so they sell for the same price. Panel (a) of Figure 1.4-5 shows how many pairs of
jeans she will buy per year at any given price per pair. Then D Darla is Darla’s individual
demand curve.
The market demand curve shows how the combined quantity demanded by all con-
sumers depends on the market price of that good. (Most of the time, when econo-
mists refer to the demand curve, they mean the market demand curve.) The market
demand curve is the horizontal sum of the individual demand curves of all consumers
in that market. To see what we mean by the term horizontal sum, assume for a moment
that there are only two consumers of blue jeans, Darla and Dino. Dino’s individual
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