A product whose demand decreases when income increases and increases when income falls is known as which type of good?

A product whose demand decreases when income increases and increases when income falls is known as which type of good?

• A. Normal Goods
• B. Inferior Goods
• C. Substitutes
• D. Complements

Answer: (B)

This question tests how demand responds to changes in income, which is measured by income elasticity of demand. A good that is demanded less when income rises and more when income falls has negative income elasticity, so it is an inferior good. The intuition is that as people gain more income, they shift to higher-quality or more expensive substitutes and buy less of the cheaper or lower-quality option. When incomes fall, they cut back on pricey items and buy more of the cheaper alternative. Normal goods, in contrast, have positive income elasticity: demand increases when income increases. Substitutes are goods that can replace each other in consumption, so a change in income isn’t what defines them. Complements are goods often used together, and again, the defining feature isn’t how demand moves with income.

This question tests how demand responds to changes in income, which is measured by income elasticity of demand. A good that is demanded less when income rises and more when income falls has negative income elasticity, so it is an inferior good. The intuition is that as people gain more income, they shift to higher-quality or more expensive substitutes and buy less of the cheaper or lower-quality option. When incomes fall, they cut back on pricey items and buy more of the cheaper alternative.

Normal goods, in contrast, have positive income elasticity: demand increases when income increases. Substitutes are goods that can replace each other in consumption, so a change in income isn’t what defines them. Complements are goods often used together, and again, the defining feature isn’t how demand moves with income.