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IAI Actuarial Core Principles · Business Economics · Consumer demand and behaviour

Rising incomes in India lead to a fall in the quantity of loose, unbranded edible oil demanded at every price, while demand for branded packaged oil rises. Loose oil is best described as which type of good, and what happens to its demand curve?

Loose oil is an inferior good, because demand for it falls as income rises. Since quantity demanded falls at every price, the whole demand curve shifts to the left rather than there being a movement along the curve.

  1. AA normal good; the demand curve shifts right
  2. BA Giffen good; the demand curve slopes upward along the same curve
  3. CAn inferior good; the demand curve shifts leftCorrect
  4. DA complement to branded oil; the demand curve shifts right
  5. A luxury good; the demand curve becomes steeper

Explanation

A good whose demand falls when income rises has negative income elasticity and is inferior. The fall in quantity at every price is a leftward shift of the whole demand curve. A Giffen good is a rare special case and would not be identified by this evidence alone.

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