Normal and Inferior Goods

In an interview posted on NPR (http://www.npr.org/2011/08/19/139774844/grocery-shoppers-leave-wal-mart-for-dollar-stores?ft=1&f=1006), retail research analyst Brian Sozzi explains the reason behind Wal-Marts lower-than-expected sales figures. He explains that Wal-Mart's core customer makes between $30,000 and $60,000, however, with the economy struggling to climb out of a recession, many of those core customers are forced to stretch their income. Mr. Sozzi explains that due to the reduced income of customers, many households are purchasing cheaper brands of products and in smaller package sizes and the beneficiaries of all of this are the dollar stores. Dollar Tree, Family Dollar, etc. have all seen their stock prices rise backed by increased earnings.
The trend of individuals and households migrating towards dollar stores illustrates the economic principle of normal and inferior goods, a concept illustrated in our most recent assignment. The text Managerial Economics, authored by Ivan Png and Dale Lehman, explains that "...the demand for a normal product is positively related to changes in a buyer's income. By contrast, the demand for an inferior product is negatively related to changes in a buyer's income" (29). In the case of Wal-Mart and the dollar stores, we see that certain products at dollar stores are inferior goods because as buyer's income has decreased, demand for these products have increased.

1 comment:

Dr. Tufte said...

Excellent post.

We're all friends here ... you can just say something like (see page 29 in the text) rather than a full cite.