In year 2020, Pakistan faced the deadliest of the natural calamities in form of locust attack. Due to this, the agriculture sector faced a loss of almost 353 billion rupees. Both the winter and summer crops were damaged partially, and after the many years the Government of Pakistan has decided to import food items to maintain the market price. In this background lest assume, two groups A and B are living in the country, with certain rational behavior towards the commodity prices of essential food items like wheat. Both groups have different opinion about wheat. People from groups A consider wheat as a staple food, while people from group B consider it as a normal good. During the last month due to the fall in the commodity prices, if was observed, that people from group A, decreased their demand for wheat, whereas people from group B increased their demand for wheat.
Requirement:
- Which type of product is wheat for people from group A and people from group B?
- What will be the income effect for the people from group A?
Solution:
A1:
A giffen product is a good
for which demand increases as the price increases, and falls demand when the
price decreases. Because it is human mentality that higher cost products are (Raise For Success) better. Decrease in the price will definitely decrease the demand for what A
product. Demand decreases price decreases quantity decreases. B is suitable
product because decrease in the price of a wheat (Raise For Success) will decrease demand for its
substitute. An inverse relationship is represented by a downward sling line
from left to right.
A2:
Inferior goods are good
for which demand declines as consumers real income rise. So, falls demand when
the price decreases. (Raise For Success) So income increase so he do not take any goods who have
not beneficial for consumer because very caring for health.
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