Question: G.R.

Dry Foods Distributors specializes in the wholesale distribution of dry goods, such as rice and dry beans. The firms manager is concerned about an article he read in the Wall Street Journal indicating that the incomes of individuals in the lowest income bracket are expected to increase by 10 percent over the next year. While the manager is pleased to see this group of individuals doing well, he is concerned about the impact this will have on G.R. Dry Foods. What fact might lead the manager to be concerned? If true, what do you think is likely to happen to the price of products G.R. Dry Foods sells? Answer: There are three types of goods Inferior goods, Normal Goods and Luxury Goods. The fact that the manager of G.R. Dry Foods is concerned may be because the dry goods sold by this company may be Inferior Goods. In economics, Inferior Goods behave differently from Normal Goods. The inferior goods, which are associated with the lower strata of the socio-economic groups, the demand of the goods decreases as the income of the group increase. Some other examples of Inferior Goods may be cheap cars or public transport. As the income of the society increases, they would want to upgrade to better branded cars and hence the demand for cheap cars will decrease over time. To understand the effect of increased income on the price of an Inferior Good, we see its demand curve:

Income Rises P1

Income Falls D3 D1 D2 Q1 Q

P2

As we see from the demand curve of an Inferior Good, let D1 be the demand curve under current conditions. As the income increases, the demand curve will shift inwards (D2) and as the income falls, the demand curve will shift outwards (D3). Thus, if the situation given in the question turns out to be true, then the demand curve will shift inwards (D2) when the income increases. Hence, for a fixed Quantity, Q1, the Price of the goods will decrease from P1 to P2.