00:01
If the price of pasta increases and the consumer buys more pasta, we can infer that a, pasta is a normal good and the income effect is greater than the substitution effect.
00:11
B, pasta is a normal good and the substitution effect is greater than the income effect.
00:16
C, pasta is an inferior good and the income effect is greater than the substitution effect.
00:21
Or d, pasta is an inferior good and the substitution effect is greater than the income effect.
00:27
So let's first define inferior good.
00:30
So an inferior good so with inferior goods the demand for an inferior good decreases as income increases or the economy improves so demand will decrease as income increases or economy improves and the idea behind this is like if you don't have a lot of money you may not be buying the brand name things that you wish you could afford so for example, when i was in college, yeah, i ate a lot of ramen noodles because i was a poor college student like many college students.
01:28
And that's what i could afford.
01:29
Fast forward more years than i care to admit.
01:33
No, i don't eat ramen any longer because i don't have to.
01:36
I make more money.
01:37
I can afford items i wish i could have then.
01:40
So that's the idea of an inferior good is as we make more money, we buy the things we wish we could have before kind of thing.
01:48
So what are the income and substitution effects? so the income effect describes how the change in a price of a good can change the quantity the consumers will demand.
02:06
So it describes how a price change can change consumer behavior of related goods...