Friday, April 18, 2014

Family Dollar is closing lots of its stores. Is this a sign that it is an Inferior Good?

Is the retail chain Dollar Family Stores an "Inferior Good" or a "Normal Good"?

Here is an article regarding the closing of over 300 stores nationwide with the implication that as the economy recovers and incomes rise fewer people are shopping at their stores.  They experienced rapid growth during the recession as unemployment spiked and incomes decreased.

Family Dollar: Is bad news for store good news for US economy? 

 Family Dollar is closing 370 US stores and will open fewer new ones. After booming during the recession and its aftermath, Family Dollar could feel the pinch of Americans feeling richer, some say.

If Income decreases and the Demand for a good (or service) increases the good (or service) is considered to be "Inferior".  Make less money you downsize from something more expensive to something less expensive.  The opposite is true also:  if Income increases the Demand decreases for the good or service. Inferior goods are characterized by an inverse relationship between changes in Income and Demand for the good or service.

With a "Normal" good or service there is a direct relationship between changes in Income and changes in Demand.  Make more money you "up-size" from something less expensive to something more expensive. When income decreases consumer Demand less of the good or service.

All this really describes is desirability of a good or service relative to changes in income at any point in time.

One person's Inferior good might be someones elses Normal good.  

If you are a Target shopper and your income decreases you have to shop at Family Dollar, then Target is a Normal good for you and Family Dollar is an Inferior.

If you are a Family Dollar shopper and your income increases you start shopping at Target, then Family Dollar is Inferior and Target is Normal.  

While it certainly varies from individual to individual I would say Family Dollar is an Inferior good, not in terms of the value it adds to society, but as descriptor of a basic term we learn in Microeconomics.

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