September 29, 2010

Pizza, Inferior Goods, and Whoopee Cushions by Veronica Graves

KFOX news reports, Some Industries Doing Very Well Despite Bad Economy, by Derek Shore, is an interesting article when dissected in economic light. According to Shore’s report, the US recession has affected three major industries. Although Shore theorizes, he seems somewhat unsure as to the reason behind the economic growth in cosmetics, video games, and Little Caesar’s pizza. Shore hints that quality may have something to do with this trend.

From an economist’s point of view, the reasoning for the afore mentioned growth is somewhat more plain. During a recession, consumers have less income. Consumers still wish to purchase the normal goods that they were buying before, but now they have less income to do so. During a recession, there is less supply of normal goods at a low enough prices to fit within a consumer’s budget. This deficiency leaves many unhappy consumers. These unhappy consumers still wish to fulfill their wants. They turn to inferior goods. In the consumers mind, an inferior good is second best to the previous option. However, it is important to realize that an inferior good could be a hamburger instead of a hot dog. Inferior does not deal with quality as Mr. Shore insinuated. Instead, inferior deals with the comparison of the average total cost of the item with the individual consumer’s income and amount purchased by the consumer. As income decreases, the amount purchased of the inferior good will increase due to the constraints felt by the individual’s budget line or amount they are able to spend on the good.

In economics, it is assumed that consumers are rational. Therefore, they will seek to maximize their utility. In a recession, consumer’s preferences have not changed, but rather, consumers have less income to satisfy their previous wants or preferences. Inferior market exchanges become more beneficial to some suppliers and many consumers in time of recession.

Again, each consumer knows what his or her normal and inferior goods are. Economists are unable to know that Sally cannot purchase her normal good, funny money, so she instead buys an inferior good, a whoopee cushion. Derek Shore guessed why these three industries were growing. His reasoning for all three came down to a human desire for comfort during hard times; while his idea may be plausible, it would be difficult, if not impossible to prove. Economists cannot say with factual evidence what a normal good will be from one year to the next; much less can we predict inferior goods from person to person.

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