Bus as Inferior Good

Topics: Consumer theory, Inferior good, Goods Pages: 2 (724 words) Published: February 14, 2011
Assumed that you earn Rp 2,000,000 (after income tax, etc) every month and you work in Sudirman, which is far enough from your house in Grogol. You do not have any car or motorcycle that can reach your office. Either you cannot rent a room or house that is closer to your office due to your income. So the best way to go there is by taking a bus everyday because it is quite impossible to take a taxi cab since your income is very limited. It is better to take a bus which is cheaper than taxi and easy to be found, but it is more time consuming and less convenient compared to taxi cab. When money is constricted, travelling by bus becomes more acceptable, but when money is more abundant that time, more rapid transport is preferred.

As you career rises, you get promoted, and you get a better job at higher level or position. Of course this is followed by the rising salary every month. Now you earn Rp. 5,000,000 per month. This rising salary leads to your desire to reduce the time you spend everyday to wait for the bus and of course to get more convenience. You start to think about taking taxi everyday to your office. As your income has risen, you have the ability to afford the taxi fare. Assumed the taxi fare for one way is Rp 40,000. So to go back-and-forth everyday is Rp 80,000. Your spending for taxi for one month is Rp 1,600,000 (20 days x Rp 80,000). So you have Rp 3,400,000 for saving, living cost, shopping, and other expenses every month. This is quite impossible if your income still Rp 2,000,000 and you will end up with only Rp 400,000 saving.

From this illustration, we can say that BUS IS AN INFERIOR GOOD and TAXI IS A NORMAL GOOD in this case. In consumer theory, inferior goods are goods for which demand tends to fall when income rises, while normal goods are goods for which demand goes up when income is higher and for which demand goes down when income is lower. Derived from these definitions, the demand for taxi is up when our...
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