Normal and Inferior Goods  Economists classify a good as either normal or inferior, depending on whether consumers spend more or less on that good as their income increases.  Normal goods are those that people buy more of as their income increases.  Inferior goods are those that people buy less of as their income increases.  Luxury Goods are very expensive normal goods. We demand more of as our income increases, vice versa. I.e. We will buy more luxury items like a boat as our income increases. A luxury good is a sub set of normal goods.

Normal or Inferior?

Household income and Consumption Patterns

WALT: Explain relationships between household income and consumption patterns.  A household: Group of consumers who live under one roof. May consist of an individual, couples parents their children family friends or flatmates.  The level of income a household earns has an effect on our demand. earns has an effect on our demand.  As income changes our spending patterns change

Aggregate household spending  When we add all households together we call it aggregate.  Spending patterns can be broken down into 4 groups  1. Necessities. e.g food, clothing, shelter  2. Basic services and wants e.g transport  3. Luxuries and other services e.g meals out  4. Savings

Income and Consumption patterns  When we earn an income the first thing we do is spend our disposable income on necessities.  At lower income levels, there may be little disposable income left over after the basic needs have been paid for.  Paying for necessities will take up a larger proportion of our disposable income for low income levels.

Income and Consumption patterns  As our disposable income increases we may decide to demand less inferior goods and instead buy more better quality goods.

Income and Consumption patterns  A household has only so many needs. Once out needs and basic wants are satisfied then the demand for luxury goods increases.  As we earn more income we are able to afford luxury items such as cellfones, going to the movies HD TVs going on overseas holiday etc. Luxury goods are certainly not essential for our survival.

Income and Consumption patterns  At higher levels of income we begin to spend more on luxury goods. However the amount of income spent on necessities will still be the same  BUT the proportion of total income spent on necessities begins to fall and the proportion spent on luxury goods starts to increase.

Savings  Savings= Proportion of income not spent. As our incomes increase the proportion of income that may be saved will increase.

Aggregate patterns of household spending  At low incomes most money is spent on necessities money is spent on necessities  As income increases the amount spent on necessities does not increase greatly but more basic necessities and wants can be purchased  Luxuries can only be afforded by those with higher incomes  Savings occur at higher levels of income because at these income levels people do not spend all that they earn. Expenditure (spending) Income luxuries savings Necessities Basic wants and services

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