Revenues of Inferior Goods Producer

Question: Discusss about the How Revenues of Inferior Goods Producers are Expected to be Affected by Economic Recessions and Expansions. Answer: Introduction: As argued by Kubler, Selden Wei (2013), when the income of the person rises, the demand for the normal good increases, whereas, the demand for the inferior good decreases. In specifically, when people have more money, they avoid consuming the inferior good. Thus, the less consumption of inferior good indicates not only the reason of poor quality but also the affordability. However, during the recession period, people want to consume less, and they choose inferior good instead of normal good (Dziadkiewicz, Pisani Wong, 2015). In this research essay, the impact of the recession on normal and inferior good has been analyzed. Apart from this, the condition and impact of revenue regarding inferior good by economic depression and expansion have also been critically evaluated. In this perspective, the relation of the income elasticity of demand with the recession has been briefly stated. Discussion: According to Chen, Peng Hung (2015), the income elasticity of demand (em) can be defined as the percentage change in quantity demanded in respect to the percentage change in income. In the case of normal good, higher income raises the quantity demanded, and the income elasticity is positive (em 0). On the contrary, for inferior good, higher income lowers the quantity demanded (Mark, Southam, Bulla Meza, 2016). When the income of a consumer rises, the person is more likely to take a taxi or car ride rather than a bus ride. Now, the bus ride is inferior to him. As a result, the income elasticity of demand is negative for inferior good (em 0). Figure 1: Income elasticity of demand for inferior good Source: (As created by author) According to this figure, to the right of the point G, X is an inferior good to the consumer as em 0 in this case. On the contrary, the situation has reversed during the period of recession. In the words of (Schild, Fricke Neugebauer, 2013), during the recession period, the incomes of the people fall, and as a result, the people want to consume less to save money. Thus, most of the people choose inferior good instead of normal good. In this meanwhile, people want to substitute the expensive goods to cheaper goods for decreasing their consumption level (Dziadkiewicz, Pisani Wong, 2015). Moreover, when the economy faces the depression or recession period, the income of the people falls, and the people have a smaller amount of money for consumption purpose. As a result, for the normal good, a recession of the economy shifts the demand curved towards the left (Allgrunn Weinandt, 2016). Figure 2: Shift of the demand curve for normal good Source: (As created by author) However, for the inferior good, a depression in the economy shifts the demand curve upwards. This situation indicates the fact that people want to buy more inferior good instead of normal good. In addition, they substitute the most expensive good to the less expensive one (Kubler, Selden Wei, 2013). Figure 3: Shift of the demand curve for an inferior good Source: (As created by author) On the other hand, as per the view of Dziadkiewicz, Pisani Wong (2015), during the period of economic recession, people receive a lower amount of money as well as income. As a result, total revenue increases in the economy. On the contrary, when economic expansion presents in the economy, people receive a higher amount of money (Chen, Peng Hung, 2015). This situation leads to the decrease in total revenue in the economy. In this perspective, it can be notified that though the recession is bad for the economy, it has a positive effect. As opined by Mark, Southam, Bulla Meza (2016), during the recession period, the natural tendency of the people is to save more money which leads to the situation of economic growth. Moreover, this positive tendency lowers the amount of debt and the debt seeking attitude is also minimized from the mind of the people. In addition, more money is available in the economy which can be used for the investment purpose. It indicates the fact that the banks have a huge amount of money which they invest for boost up the economy (Schild, Fricke Neugebauer, 2013). Thus, the revenue of the economy goes up in the recession period. On the other hand, the contradictory nature is seen during the expansion period of the economy. In the words of Allgrunn Weinandt (2016), when the expansion period exists in the economy, people want to spend more amount of money instead of saving. As a result, less amount of money is available to the banks for investment purpose. This situation leads to the lower amount of revenue in the economy. Moreover, in this perspective, it can be deduced that inferior good can be able to raise the amount of revenue during the recession period (Mark, Southam, Bulla Meza, 2016). In the context of food item which is a necessary good, the income elasticity is less than one. It is also an inferior good. Thus, during the recession period, the demand for restaurant services decreases which is a normal good whereas, demand for grocery stores increases which is an example of an inferior good. By the same logic, Wal-Mart is an inferior good and Target is normal. Conclusion: By the above critical analysis of the impact of the recession on the economy, it can be concluded that inferior good is more effective to raise the amount of revenue to compare to normal good. In the recession period, people want to consume more amounts of inferior good and less of a normal good. Moreover, the income elasticity of demand is also negative for the inferior good. However, it has a positive effect on the economy during the recession period. In this perspective, people prefer to choose less expensive or inferior good and save a huge amount of money. As a result, banks have a lot of money which are used for the investment purpose. This situation boosts up the economy which leads to the economic growth of the country. On the other hand, during the period of economic expansion, people want to spend more which leads to reduction in the amount of revenue. References Allgrunn, M., Weinandt, M. (2016). Is Shopping at Walmart an Inferior Good? Evidence from 1997-2010.The Journal of Applied Business and Economics,18(1), 77. Chen, A., Peng, N., Hung, K. P. (2015). 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