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  • I sensed some confusion coming out of the last video.

  • And for your good, so I thought I would do another one.

  • So let's make, let's assume that there's

  • three cars in the market, and what

  • I want to do with this is I sense that some people thought

  • that I was suggesting that a car in general is an inferior good,

  • and that's not what I was saying.

  • I was saying, if we lived in a reality

  • where everyone owned a car and a car was a necessity for life,

  • and that is true in much of the developed world,

  • I was saying that the cheapest car in the market

  • might be considered an inferior good.

  • And to think about that, let's just

  • think about the entire population.

  • So let's say this line, this line

  • represents the entire population in our place,

  • in our developed country, where everyone owns a car.

  • And let's say, let's represent this car with a blue.

  • So let's say maybe 1/3 of the people right now have that car.

  • Now, let's say a good chunk of the people

  • have this midsize sedan, this is probably the car

  • that most people would like to have, it's a little bit safer,

  • it's a little bit larger, it's a more powerful engine.

  • And so this is where most people are sitting.

  • And then you have this ultra, this kind of luxury,

  • you have this luxury car, Rolls Royce maybe.

  • And so that is a very small segment.

  • So this end of the line is the poor, in our population.

  • This is the rich right over here.

  • So this is at some given income level,

  • and maybe we could say this is true at a particular price

  • point.

  • But what we're going to talk about is

  • the general impact on demand-- so

  • on the entire curve at any given price point,

  • always assuming that this is the most expensive,

  • this is in between, and this is the least expensive.

  • Now, what happens if income goes up from here?

  • Well, the very poorest, they're not

  • going to be able to necessarily just trade up

  • to this midsize sedan yet, although they maybe

  • have more income for other things

  • or maybe they can get a nicer version of this.

  • But for the most part, they're still

  • going to be driving this car.

  • But at kind of the boundary right over here,

  • if the incomes do go up, there will

  • be people who now could afford the mid-size car,

  • and that's what they want.

  • And so these people might start buying the midsize car.

  • And then what will happen over here, well, maybe there's

  • a few people at the boundary over here,

  • they now have the money to afford this very expensive car,

  • and it suits their tastes.

  • And so they also, a very small proportion, also grows there.

  • So what happened here?

  • When income went up, the quantity

  • demanded at a particular price point

  • for this smallest car went down.

  • But the demand for this midsize car went up,

  • it took a much bigger chunk out of this blue

  • than a chunk was taken out of it by the orange,

  • and also the demand for this very expensive car went up.

  • And that was at a particular price point,

  • but assuming that this is the most expensive,

  • this is the middle, and this is the cheapest expensive,

  • this would be true of probably any price point.

  • And so we have this phenomenon that when income went up,

  • the quantity demanded at multiple price points

  • for this car-- so let me draw its actual demand curve.

  • So this car right over here, this is price, this over here

  • is demand.

  • If its old demand curve looked something like this,

  • we're saying-- and maybe when we thought about this at first,

  • we're thinking of the price point right

  • over here, we notice when income went up,

  • at that particular price point, the quantity

  • demanded went down, and that'd be true pretty much any price

  • point, assuming that this is always the cheapest car.

  • So at any price point, you would have a decrease in demand.

  • Remember, when we talk about a decrease in demand,

  • we're talking about a shift of the entire curve,

  • we're not talking about just one particular quantity.

  • Now, there's another interesting question that was asked,

  • and I think it was a very nice and subtle thing

  • to think about.

  • I keep drawing these shifting demand curves,

  • and if at least I understand the question properly,

  • the question is well, does the curve,

  • when it shifts, does it necessarily shift perfectly

  • or does sometimes it change?

  • Does it shift more at one price point or another?

  • And the simple answer is it can.

  • In fact, in very few circumstances would

  • it probably be a perfect shift.

  • Depending on the price point you're at,

  • it would probably shift a little bit different.

  • So the actual shape of the curve might

  • change while it's shifting.

  • But anyway, going back to this, so we see this cheap car right

  • here had the unusual property that when incomes went up,

  • the demand curve shifted to the left.

  • And that's why we call this an inferior good.

  • These other two cars when-- so that's price, and this is

  • demand-- these other two cars when income went up--

  • so if this was the demand curve at first-- when income went up,

  • demand went up.

  • The whole curve got shifted to the right, so they are normal.

  • So these are normal goods.

I sensed some confusion coming out of the last video.

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