Tuesday, October 15, 2013

Nice market example of an Inferior and Normal Good. Only this one involves the SAME product...

A basic concept when leaning about Demand is to differentiate between a good that is termed a Normal Good and/or an Inferior Good.  Both are related to changes in Income.

If income increases (or decreases) and the Quantity Demanded of a good decreases (Increases) then the good is an Inferior good. If income increases (or decreases) and the Quantity Demanded of a good increases (decreases) then the good is a normal good.

If there is a direct relationship between changes in income and changes in Quantity Demanded then the good is a normal good. If there is an inverse relationship the good is an inferior good.

Here is a real life example of this in action. They don't explicitly use  "normal" and "inferior" but they are there.

As income rises people don't want the "inferior" Nano, they want one that is a little more tricked-up and has some extras. Seems the Nano is transforming itself into a Normal good.

Why the World's Cheapest Car Flopped

No-Frills Minicar Gets Chrome, Sound System, Higher Price to Boost Appeal


When the Tata Nano, a stripped-down minicar priced at around $2,000, was introduced in 2009, it was marketed as a car that would transform the way aspiring consumers in India and other developing countries got around.

But the low-cost automotive revolution fizzled. Selling poorly at home and with exports drying up, the Nano has become a cautionary tale of misplaced ambitions and a drag on sales and profit at Tata Motors Ltd. , India's fourth-largest auto maker and the owner of Jaguar and Land Rover luxury vehicles.
It turns out that those climbing into India's middle class want cheap cars, but they don't want cars that seem cheap—and are willing to pay more than Tata reckoned for a vehicle that has a more upmarket image.
Now, Nano is trying remake the "people's car," into the "cool people's car." It has given the car itself a face-lift, adding a stereo, hubcaps and chrome trim, raised the price and started a new marketing campaign to give it more cachet.
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