Explain how a decrease in income might affect the demand for normal goods and the demand for inferior goods.

Discuss the significance of income elasticity of demand for producers of primary products and producers of manufactured goods when incomes are rising.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definitions of demand, normal good, inferior good
• diagram(s) to show a how a decrease in income affects the demand for a normal good and an inferior good
• explanation of how a decrease in income reduces the demand for normal goods and increases the demand for inferior goods
• examples of normal goods and inferior goods.

A maximum of [6] should be awarded if a candidate has only covered normal goods OR inferior goods.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.

Answers may include:

• definitions of primary products, manufactured goods, income elasticity of demand
• diagrams to show how the demand for primary products and for manufactured goods is affected by a rise in incomes
• explanation of the impact on producers of how primary products tend to have a low YED because they are necessities (with few or no substitutes) for their buyers and demand for them changes less than proportionally when incomes change; explanation of the impact on producers of how manufactured goods tend to have a high YED because they can be luxury goods and demand for them increases more than proportionally when incomes increase
• examples of primary products with a low YED and manufactured goods with a high YED
• synthesis or evaluation (discuss).

Discussion may include: consideration of primary products that have a high YED and/or manufactured goods that have a low or negative YED, the YED of a good depends on the income level in the economy, the problems of measuring YED because other factors affecting the demand for primary products and manufactured goods apart from income are changing at the same time.

A maximum of [9] should be awarded if a candidate has only covered producers of primary products OR manufactured goods.

This question was generally well answered by candidates with the best answers explaining how a decrease in income would lead to a fall in demand for normal goods and a rise in demand for inferior goods. These answers were supported by effective demand and supply diagrams and good use of real-world examples.

This question proved challenging for students. The application of income elasticity of demand (YED) to primary goods and manufactured goods is something candidates have found quite difficult in the past and this session was no different. The best answers considered how primary goods tend to have a low YED and manufactured goods a high YED and how this affects the revenues of producers when incomes are rising. Students struggled to evaluate the points they made in the answer, although the strongest responses did consider evaluative points such as the impact factors other than income affect demand for primary goods and manufactured goods.