How do changes in income affect the demand for a good?

Consumer demand and income

Engel curves

An Engel curve describes how household expenditure on a particular good or service varies with household income. “They are named after the German statistician Ernst Engel (1821–1896), who was the first to investigate this relationship between goods expenditure and income systematically in 1857.” The best-known work is Engel's law which “states that the poorer a family is, the larger the budget share it spends on nourishment.”

“Engel curves for normal goods slope upwards – the flatter the slope the more luxurious the good, and the greater the income elasticity. In contrast, Engel curves for inferior goods have a negative slope.”

Illustration source www.economicsonline.co.uk

Microeconomic Factors Affecting Consumer Demand

In microeconomics attention is paid on the relationship between the price of a product and how much consumers are willing or able to pay for that product-service, so, it becomes important to observe all of the factors that affect demand for a good or service.

Product Price

There exists an inverse relationship between the price of a product and the amount of that product consumers are willing pay. “Consumers want to buy more of a product at a low price and less of a product at a high price. This inverse relationship between price and the amount consumers are willing and able to buy is often referred to as The Law of Demand. “

Disposable Income

The effect that disposable income has on a product that consumers are willing or able to buy depends on the kind of product is being described. In general there is a positive relationship between a consumer's income and the amount of the good that they are willing or able to buy. In this relationship as income raises the demand for the product increases and when income decreases, the demand for the same product will also decrease. These Items are generally referred to as normal goods.

Data observation on consumer behavior exposes that a change in income has a reverse effect. For instance, a low-quality ground beef at lower cost is attractive to low income families, because it is inexpensive relative to other types of meat. However, when income increases, the data shows that the same family might decide to stop buying this low quality of meat and instead buy higher quality. When this happens, there would be an inverse relationship between income and demand for this type of meat is referred to as an inferior good. These are not necessarily low-quality goods as the term inferior is used in economics it only means the an inverse relationship between one's income and the demand for that good exists.

Price of Similar Goods

Comparison of two goods that are typically consumed together like bread and butter are complimentary goods. If the price of one goes up, the Law of Demand states that consumers will be willing or able to buy fewer loafs of bread. It follows that fewer loafs of bread, we will also result in less butter because typically are used together. This can be summarized by stating that when two goods are complementary to each other, there is an inverse relationship between the price of one good and the demand for the other good.

Moreover, some goods are substitutes for one another which mean they are not consume together, but instead a choice is made to consume one or the other. For example, several brands of soda have similar price and can be substitutes of one another but what is a substitute good for one person may not be a substitute for another person. If the price of a preferred soda increases, it might make a similar substitute relatively more attractive. Summarizing it can be said that when two goods are substitutes of each other, there is a positive relationship between the price of one good and the demand for the other good.

Consumer Preferences

This is a less perceptible data point that still can have a big impact on demand. There are many things that can change a person’s tastes or preferences that can cause people to want to consume more or less of a given product. Here is where advertisement plays a role especially, if the advertiser is a celebrity endorsing a new product, in order to increase the demand. On the other hand, if a health study determines that a given item is bad for a person’s health, it will decrease the demand for such product. Measuring how much decrease is important for advertisers of negative products such as tobacco and alcohol. Moreover, demand can suddenly pick for unexpected items such as a raincoat in a rainy day or a sweater on a cold day.

Consumer Expectation

It doesn't matter what the current fad is if for the near future a consumer expects a better or cheaper product that will soon be available. When people decide to wait, they are decreasing the current demand for a given product because of what is expected of a new product in the future. In a similar way, if one expects the price of oil to go up tomorrow gas station will soon raise their price and one may fill up a car at with at current price. In this case demand goes up for gas today because the expectation is that the price will go up soon. This is a common event during a national disaster all based on the expectation of what would happen when price gouging starts as a result of a rush of higher demand for a needed emergency product.

Consumers Market

The number of consumers in given market also affects the behavior of pricing as more or fewer consumers enter the market it has a direct effect on the amount of a product that consumers are willing or able to buy. For example, a food stand on a high traffic pedestrian area will have more demand and higher sales during lunch hour. In the afternoon, when less pedestrians are on the street, the demand for food will decrease because the number of consumers in the area has significantly decreased.