1. Types of Good To begin: Name 10 different types of food. These can be ANYTHING

2. There are a few different ‘types’ of goods and services (we use goods to mean both), and these are split into different categories depending on how their supply and demand curves react to changes in income and price.

3. Normal Goods • Normal goods, like the name suggests, behave in a reliable, predictable way, the way we would ‘normally’ expect goods to react. When we have discussed goods before, we were almost always talking about Normal Goods • When a household’s income increases, we expect the DEMAND for a Normal Good to increase also.

4. Inferior Goods • Some goods don’t react in this way. • Sometimes, when a household’s income increases, there is LESS demand for it. This is because the household turns to another good to replace it. This might be an upgrade (ASDA Jaffa Cakes to McVities), or a change in lifestyle (driving instead of catching a bus.

5. Some examples… • Chocolate. Most people – particularly people such as you, will buy more chocolate if they had more money. NORMAL GOOD • Budget clothing. If the average person made more money, they would probably visit Primark less. INFERIOR GOOD

6. Make a list of 5 of each please • Don’t forget, the reverse is also true. When income DECREASES, demand for normal goods DECREASE, and demand for inferior goods INCREASE.

7. A bit of both… • Some goods are both Normal and Inferior, depending on the level of income. • Think of buses, for a second. • At very low levels of income, you might walk as much as possible. Earn a bit more, and you might splash out on the bus. Earn a lot more and you might only use taxis.

8. My least favourite graph… ever Which is: NORMAL? INFERIOR? BOTH?

9. A bit of Maths • Look back at your definition of Income Elasticity… • Using what we have just looked at (Normal and Inferior Goods), what is the YED for each going to be (positive or negative)?

10. Income and Substitution Effects • Ultimately, there are two effects of price on quantity demanded. The income effect, and the substitution effect. • The Income Effect simply means that when the price increases your real income falls (you’ve got less to spend). If the good is Normal, you will buy less of it. For an Inferior good however, you are inclined to buy more of it. • The Substitution Effect is the rate at which you swap your spending to something else, because those goods appear to be cheaper. This ALWAYS happens.

11. A quick table Substitution Effect Income Effect Normal Fall Fall Inferior Fall Rise Giffen Fall Rise

12. Giffen Goods • Rarely  the income effect is bigger than the substitution effect. This means that a rise in price will increase demand because of the income effect, but this will not be cancelled out by the substitution effect (an inferior good). • This leaves us with a big problem…

13. AN UPWARD SLOPING DEMAND CURVE!

14. Other Upward Sloping Demand Curves • There are a few theoretical examples of where this might happen. • Theoretical – “concerned primarily with theories or hypotheses rather than practical considerations” • In other words, as economists, we think there will be cases where this is true. However, we haven’t found any that consistently work yet…

15. Four Possible DUPs • Giffen Goods • Veblen/Snob Goods • Speculative Goods • Quality Goods

16. • Of these, only Giffen goods work. Snob/Veblen goods only work for the very reason that the demand curve is downward-sloping (i.e., most people can’t afford them so there aren’t many Bentleys around) Speculative goods – the demand curve SHIFTS to the right as EXPECTED price rises. Quality goods – a mixture of the previous two: if people are convinced that a higher price indicates a higher quality, their tastes have changed (almost certainly affected by advertising), shifting the demand curve to the right.