Explain why an increase in income over time may lead to an increase in demand for

some goods but a decrease in demand for other goods.

Income Elasticity of Demand (YED) is the responsiveness of demand to changes in income.

Inferior good is a good which drops in demand as income increases (YED < 0)

Normal good is a good which increases in demand as income increases (YED > 0).

When consumers' income grows their demand for normal goods will increase. They have more
excess income to spend on normal goods seeking the highest possible utility. Consuming more
normal goods leads to higher utility. This leads to a increase in demand for the goods from d1 to
d2 as Income increases from p1 to p2. Normal goods which have a YED > 0 can be split to
between necessities and luxury goods which have different responsiveness to income change.
Necessities have a Yed of 0 < YED > 1 determining the responsiveness in of demand. These
goods experience like normal goods a increase in Demand from d1 to d2 when income increase
from p1 to p2. The responsiveness of demand by necessities is in contrast to luxury goods
always less than the increase in Income. This mean that the increase from p1 to p2 of 50%
means that demand will only experience a increase < 50%.

A example to better illustrate this concept would be the purchasing of groceries. If the consumer
experiences a income increase of 50% from p1 to p2 he will not buy 50% more groceries. THe
consumer will maybe buy a another egg and some more chocolate but not 50% on everything
he owns. A extension of this example would be if the consumer becomes a billionaire he will not
buy 1000% more groceries than before showing that the responsiveness of necessities is
always less than the increase in income.
A luxury good on the other hand with a YED > 1 has a higher responsiveness to change in
income. These goods experience a greater increase in demand than the increase in income. A
increase of 50% from p1 to p2 means that the demand increase from d1 to d2 will be > 50%.
This is due to the fact that with more money consumers gain the most utility from consuming
luxury goods.

A example of this concept would be the use of a car. As income increases consumers utility for
owning a car increases the more income they get. A consumer who gets a a 50% raise from
30K to 45k a year would be alot more inclined to buy a car now due to the fact that he has a
excess 15k to spend and consuming a luxury good would bring the highest utility.
On inferior the opposite is true with a YED < 0. As their income grows consumers will receive
less utility from consuming the good. This is due to the fact that inferior goods are often
substituted for luxury goods instead as income increases lowering demand for inferior. This
implies a increase in income from p1 to p2 will result in a decrease in demand from d1 to d2.

An example of this concept would be the use of public transport. As the consumer gets a 50%
increase in income the consumer has a higher demand for luxury goods. These luxury goods
such as the car will replace the inferior good of using public transport. This shows that the
inferior good of public transport was substituted for the luxury good of a car vise versa. This
then results in a decrease in demand for the inferior goods.

Whether goods are inferior or even normal goods depends on the specific situation. People in
developing countries consider Coca Cola as a luxury whereas developed countries might rather
see it as a necessity or even inferior good, which would be substituted by healthier food once
affordable. The engler curve shows this behavior perfectly of how income change changes the
classification of goods for the consumer.