Which of the following is true about inferior goods demand curve ?

Q: Which of the following is true about inferior goods demand curve ?

Which of the following is true about inferior goods demand curve ?

Question

Accepted Answer

The correct option is 1:
Ordinary demand curve is steeper than compensated demand curve.

For an inferior good, when the price of the good falls, two effects occur: the substitution effect and the income effect. The compensated demand curve (Hicksian demand curve) shows only the substitution effect, which is always negative (meaning quantity demanded increases as price falls, moving down the curve). However, the ordinary demand curve (Marshallian demand curve) includes both the substitution and the income effects. Since inferior goods are those for which demand decreases as consumer income rises, the income effect is negative (acting in the opposite direction of the price change). When the price falls, real income increases, which reduces the demand for the inferior good. This negative income effect partially offsets the positive substitution effect. Because the ordinary demand curve's total response (steepness) is dampened by the income effect, the change in quantity demanded in response to a price change is smaller for the ordinary demand curve than it is for the compensated demand curve (which only captures the larger substitution effect). Therefore, the ordinary demand curve must be less responsive to price changes, making it steeper than the compensated demand curve.

The incorrect option is 2:
Ordinary demand curve is flatter than compensated demand curve.
This is incorrect because a flatter curve implies greater responsiveness (more elastic) to price changes. For inferior goods, the negative income effect reduces the overall quantity response to a price change, making the ordinary demand curve less elastic and thus steeper, not flatter.

The incorrect option is 3:
Ordinary demand curve is parallel to the compensated demand curve.
This is incorrect because the two curves being parallel would imply they have the exact same elasticity (slope) at all prices, which contradicts the existence of a non-zero income effect for inferior goods. The difference in slope arises precisely because the ordinary curve incorporates the income effect while the compensated curve does not.

The incorrect option is 4:
Ordinary demand curve is perpendicular to the compensated demand curve.
This is incorrect. Demand curves typically have a negative or zero slope. Perpendicular curves would mean one has a positive slope and the other has a negative slope (or one is vertical and one is horizontal), which is not the relationship between the Marshallian and Hicksian demand curves for any normal or inferior good, except for the rare theoretical case of a Giffen good.