Biresh Sahoo, Ph.D.

Full Professor, XIM, Bhubaneswar

Lecture 7
 Normal goods and inferior goods
Good (y) An increase in income
increases/decreases the
consumption of
yd
D normal/inferior goods.

B
yb
A
ya
C
yc

0 xd xa xb xc Good (x)
Inference: No consumption basket can have all goods to be inferior
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Individual demand curve: Law of demand
y

 An individual’s I/py

demand curve is
derived from each new Eo

equilibrium point E1
found on the
indifference curve as x
xo I/po x1 I/p1
the price of good x is px
D
varied. po
A

Demand function for x:

x  D (px,py ,I , z ) p1
B

Demand curve for x: D

x  D( px, py, I , z ) xo x1
x
Examples of
demand function vs. demand curve
Demand function for good x : x  100  2 px  0.5 p y  3I
Let us fix p y and I at some level: p y = 10, I = 100

Demand curve for good x : x  405  2 px

At px = 12.5, x  380 At px = 7.5, x  390
Assume that income is increased to I  = 200.
New demand curve for good x : x  705  2 px
At px = 12.5, x  680 At px = 7.5, x  690
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 px Assume that income rises to I = 200

x  405  2 px x  705  2 px

12.5

7.5

x
380 390 680 690

Increase in quantity demanded Increase in demand 5

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 Examining Law of Demand
Good (y)

I/py

E1
y1 Restatement of the law of demand:
if a bundle Eo is affordable when
the bundle E1 is purchased, then
yo Eo when the bundle Eo is purchased,
the bundle E1 must not be
affordable (why?)

Good (x)
xo I/po I/p1
 Testing the law of demand: an example

Observation p1 p2 x1 x2
1 1 2 1 2
2 2 1 2 1

Cost of each bundle at each set of prices

Bundles
A B
Prices

1 5 4
2 4 5

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Are the purchase decisions made by the
consumer consistent with the law of demand?
x2
Case I: Comparing bundle B when
5
bundle A is purchased
4

3
2.5
A
2
u1
1 B
uo

x1
o 2 3 4
1 5
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 Case II: Comparing bundle A when
bundle B is purchased

x2

3
A
2

B
1

x1
o 1 2 2.5 3 4 5

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 Combining Case I and Case II

x2

3
uB
2.5 A
2
uA
B
1

x1
o
1 2 2.5 3 4 5

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 The consumer choices are inconsistent with the
economic theory of the consumer behavior as it violates
the weak monotonicity postulate.
To restate the law of demand, the rule should be as follows:
If the bundle (y1,y2) is affordable when the bundle (x1,x2) is
purchased, then when the bundle (y1,y2) is actually
purchased, the bundle (x1,x2) must not be affordable.

Mathematically speaking, if the bundle (x1,x2) is

purchased at prices (p1,p2) and the (y1,y2) is purchased at
prices (q1,q2), then if
p1 x1  p2 x2  p1 y1  p2 y2 ,
then, q1 y1  q2 y2  q1 x1  q2 x2 .

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