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May 24th, 2012, 01:14 PM   #1
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income effect

Hi, I got a minor true or false question..

A decrease in income will always shift the demand leftward??

I think it is true for normal goods, however, it will shift right for inferior goods? is that correct?
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August 12th, 2012, 10:55 PM   #2
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Re: income effect

Hey pomazebog.

If this is for an actual class, then please remember that is my opinion and I'm not an economist.

That being said, what you are saying is right with regard to "cheap" goods: the stuff found in Walmart becomes more popular when there's a decline in income and if you need to write an essay, that would be be the first thing that you should check: whether profits and revenues have gone up after significant financial calamities like a recession for example.

The thing is though, it's not a simple yes or no answer.

There are a whole cascade of effects. For example if people lose jobs and incomes go down, this has a chain reaction on all businesses in general. Even if the thing is a local one (i.e. loss of jobs localized to one city instead of say an entire state or country), the thing is that this affects all people connected with not only the people with lower incomes but all the businesses in that area. If a business shuts down or does less business that affects the suppliers and everyone that they doing business with: it's like an individual link in the chain becoming weaker which affects the rest of the chain.

The other too is that there are different sectors that may benefit. As you know, if a big conglomerate gets more business, then the executives and shareholders get more as well.

You may be surprised, but when this happens you'll find that "super-goods" (like luxury goods for example) can actually rise because all these rich people have more money to blow away and it means that the so called luxury goods like jewelry, luxury homes, private jets (I'm not kidding when I say this) and all these other un-necessary exhorbitant things tend to sell more to the people that can afford them. You should do your research on this to confirm it if you are curious.

The important thing is to analyze how the changes affect not only buyer habits, but also who potentially gets wealthier off such a change and where that flow of revenue ends up heading: whether it's more factories in slave-labor countries, particular investments made to further the business that is profiting wildly, and also where these people who are on the luckier side end up spending their money.
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