Transcript Household income and Consumption Patterns

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.
Income Increases
Watties
Pams
Price ($)
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D1
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Quantity
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Quantity
Income Decreases
Mince
Steak
Price ($)
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D1
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Quantity
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Quantity
Income Decreases
Warehouse Clothing
Glassons clothing
Price ($)
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D1
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Quantity
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Quantity
Income Increases
Bus services
Taxi Services
Price ($)
D1
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D1D
Quantity
Quantity
Income decreases
Camping Grounds
Hotel
Price ($)
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D1
D
Quantity
D1
Quantity
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.
 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
Necessities
 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.
Basic Services and Wants
 As our disposable income increases we
may decide to demand less inferior
goods and instead buy more better
quality goods.
Luxuries
 A household has only so many needs. Once our 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
Expenditure
 At low incomes most
(spending)
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
luxuries
Basic wants
and services
Necessities
 Savings occur at higher levels of
income because at these income
levels people do not spend all that
they earn.
Income
Activity page 44-47