1. Lesson 2: Demand and Supply Analysis

2. Theories and Predictions
We need to be able to predict the consequences of
alternative policies, and
events that may be outside our control
The mental tool we use to make such predictions is called a theory
A theory is of no use if its predictions are inaccurate

3. We need a theory of prices
The theory of demand and supply is a simple example of an economic theory
It can be used to make predictions about the price and quantity of some commodity
In a free-market economy, most economic decisions are guided by prices
Therefore, without a reliable theory of prices, you will get nowhere in economic analysis

4. Assume perfect competition
The theory of supply and demand assumes that commodities are traded in perfectly competitive markets
A perfectly competitive market is a market in which
there are many buyers
many sellers
and all sellers sell the exact same product
As a result, each buyer and seller has a negligible impact on the market price

5. demand

6. Demand
Quantity demanded is the amount of a good that buyers are willing and able to purchase
Demand is a full description of how the quantity demanded changes as the price of the good changes.

7. Catherine’s Demand Schedule and Demand Curve
Price of
Ice-Cream Cone
$3.00
2.50
1. A decrease
in price
...
2.00
1.50
1.00
0.50 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of 2.
...
increases quantity
of cones demanded.
Ice-Cream Cones
Copyright © South-Western

8. Market Demand is the Sum of Individual Demands

9. Law of Demand The law of demand states that
the quantity demanded of a good falls when the price of the good rises, and vice versa, provided all other factors that affect buyers’ decisions are unchanged

10. “provided all other factors … are unchanged/ceteris paribus”
That’s an important phrase in the wording of the Law of Demand
The quantity demanded of a consumer good such as ice cream depends on
The price of ice cream
The prices of related goods
Consumers’ incomes
Consumers’ tastes
Consumers’ expectations about future prices and incomes
Number of buyers, etc
The Law of Demand says that the quantity demanded of a good is inversely related to its price, provided all other factors are unchanged

11. Why Might Demand Increase?
Quantity Demanded
Price
Situation A
Situation B
0.00 12 20
0.50 10 16
1.00 8
1.50 6
2.00 4
2.50 2
3.00
How can we explain the difference in Catherine’s behaviour in situations A and B?
Why does she consume more in situation B at every possible price?
Price
Quantity Demanded

12. Shifts in the Market Demand Curve
… are caused by changes in:
Consumer income
Prices of related goods
Tastes
Expectations, say, about future prices and prospects
Number of buyers 11

13. Shifts in the Demand Curve
Price of
Ice-Cream
Cone
Increase
in demand
Decrease
in demand
Demand
curve, D 2
Demand
curve, D 1
Demand curve, D 3
Quantity of
Ice-Cream Cones

14. Shifts in the Demand Curve
Consumer Income
As income increases the demand for a normal good will increase
As income increases the demand for an inferior good will decrease
Prices of Related Goods
When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes
When a fall in the price of one good increases the demand for another good, the two goods are called complements

15. The Law of Demand—Explanations
There are two ways to explain the Law of Demand
Substitution effect
Income effect

16. Substitution Effect
When the price of a good decreases, consumers substitute that good instead of other competing (substitute) goods
1. When the price of Coke decreases…
2. Consumption of Pepsi decreases…
3. Consumption of Coke increases
Clothes
Coke
Books
Movies
Pepsi

17. Income Effect
A decrease in the price of a commodity is essentially equivalent to an increase in consumers’ income

18. Lower Prices = Higher Income
Situation A
Price of an Apple
$1.00
Price of an Orange
$2.00
Income
$10.00
If income rises, Situation A becomes Situation B.
Situation B
Price of an Apple
$1.00
Price of an Orange
$2.00
Income
$20.00
If prices fall, Situation A becomes Situation C.
Situation C
Price of an Apple
$0.50
Price of an Orange
$1.00
Income
$10.00
Q: Which change is better?
A: They are both equally desirable. A fall in prices is equivalent to an increase in income.

19. Income Effect
Consumers respond to a decrease in the price of a commodity as they would to an increase in income
They increase their consumption of a wide range of goods, including the good that had a price decrease
1. When the price of Coke decreases…
2. Consumers feel richer…
3. Consumption of Coke and other goods increases
Clothes
Coke
Books
Movies
Pepsi

20. supply

21. SUPPLY
Quantity supplied is the amount of a good that sellers are willing and able to sell
Supply is a full description of how the quantity supplied of a commodity responds to changes in its price 25

22. Ben’s supply schedule and supply curve
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice-Cream
Cones
Supply curve
Price of
Ice-cream cone
Quantity of
Cones supplied
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
0 cones 1 2 3 4 5
1. An increase
in price . . .
increases quantity
of cones supplied. 12 10 11 9 1 2 3 4 5 6 7 8
Quantity of Ice-Cream Cones

23. Market supply and individual supplies
Price of ice-cream cone
Ben
Jerry
Market
$0.00
0.50
1.00
1.50
2.00
2.50
3.00 1 2 3 4 5 + 6 8 = 7 10 13

24. Market supply and individual supplies
Ben’s
supply +
Jerry’s
supply =
Market
supply
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice
Cream
Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice
Cream
Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice
Cream
Cones
SBen
SMarket
SJerry 12 10 11 9 1 2 3 4 5 6 7 8
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7
Quantity of
Ice-Cream Cones 18 2 4 6 8 10 12 14 16
Quantity of Ice-Cream Cones

25. Law of Supply
The law of supply states that, the quantity supplied of a good rises when the price of the good rises, as long as all other factors that affect suppliers’ decisions are unchanged

26. Law of Supply—Explanation
How can we make sense of the numbers in Ben’s supply schedule?
The best guess is that his costs must be something like the cost schedule below.
A specific ice-cream cone
It’s cost ($)
1st
0.75
2nd
1.35
3rd
1.75
4th
2.30
5th
2.85
6th
3.10
In this way, the Law of Supply follows from the assumption of Increasing Costs (or, Diminishing Returns)

27. Shifts in the Supply Curve: What causes them?
Price of
Supply curve, S 3
Ice-Cream
curve,
Supply S 1
Cone
Supply
curve, S 2
Decrease
in supply
Increase
in supply
Quantity of
Ice-Cream Cones

28. Supply Shift How could Ben’s supply have increased?
Ben’s Supply Schedule
Price ($)
Quantity Supplied
Before
After
0.00
0.50 1
1.00 2
1.50 3
2.00 4
2.50 5
3.00 6
Ice-cream cone
It’s cost ($)
Before
After
1st
0.75
0.45
2nd
1.35
0.85
3rd
1.75
1.45
4th
2.30
1.95
5th
2.85
2.45
6th
3.10
2.90
Anything that reduces production costs, shifts supply to the right.

29. Shifts in the Supply Curve…
… are caused by changes in
Input prices
Technology
Number of sellers (short run)
The market supply will shift right if
Raw materials or labor becomes cheaper
The technology becomes more efficient
Number of sellers increases 27

30. equilibrium

31. Interaction of demand and supply
We have seen what demand and supply are
We have seen why demand and supply may shift
Now it is time to say something about how buyers and sellers collectively determine the market outcome
To do this, we assume equilibrium

32. Equilibrium
We assume that the price will automatically reach a level at which the quantity demanded equals the quantity supplied

33. SUPPLY AND DEMAND TOGETHER
Demand Schedule
Supply Schedule
At $2.00, the quantity demanded is equal to the quantity supplied! 36

34. Equilibrium of supply and demand
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice-Cream
Cones
Supply
Demand
Equilibrium
price
Equilibrium
Equilibrium
quantity 12 10 11 9 1 2 3 4 5 6 7 8
Quantity of Ice-Cream Cones

35. Equilibrium
Can we justify the assumption of equilibrium?

36. Markets Not in Equilibrium
(a) Excess Supply
Price of
Ice-Cream
Supply
Cone
Surplus
Demand
$2.50 10 4
2.00 7
Quantity of
Quantity
demanded
Quantity
supplied
Ice-Cream
Cones

37. Markets Not in Equilibrium
Surplus
When price exceeds equilibrium price, then quantity supplied is greater than quantity demanded
There is excess supply or a surplus
Suppliers will lower the price to increase sales, thereby moving toward equilibrium

38. Markets Not in Equilibrium
(b) Excess Demand
Price of
Ice-Cream
Supply
Cone
Demand
$2.00 7
1.50 10 4
Shortage
Quantity of
Quantity
supplied
Quantity
demanded
Ice-Cream
Cones

39. Markets Not in Equilibrium
Shortage
When price is less than equilibrium price, then quantity demanded exceeds the quantity supplied
There is excess demand or a shortage
Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium

40. Equilibrium Law of supply and demand
The price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

41. Equilibrium: skepticism required
Although the Law of Supply and Demand is a good place to start the discussion of prices, it should not be taken to be the gospel truth.
In some cases the price might get stuck at some other level and quantity supplied and quantity demanded may not be equal.
Example: unemployment

42. Unemployment: a failure of equilibrium when the wage is too high and stuck
Labor
Supply
Labor
demand
Labor surplus
(unemployment)
Too-high
wage
Quantity
demanded
Quantity
supplied
Quantity of
Labor

43. Let’s make some predictions
We can use our understanding of the factors that shift the demand and supply curves to predict the consequences of
Alternative policy proposals, and
Events outside our control

44. How an Increase in Demand Affects the Equilibrium
Price of
Ice-Cream
1. Hot weather increases
the demand for ice cream . . .
Cone D D
Supply
New equilibrium
$2.50 10
resulting
in a higher
price . . .
2.00 7
Initial
equilibrium
Quantity of 3.
. . .
and a higher
quantity sold.
Ice-Cream Cones

45. How a Decrease in Supply Affects the Equilibrium
Price of
1. An increase in the
price of sugar reduces
the supply of ice cream. . .
Ice-Cream
Cone S2 S1
Demand
New
equilibrium
$2.50 4
resulting
in a higher
price of ice
cream . . .
Initial equilibrium
2.00 7
Quantity of 3.
. . .
and a lower
quantity sold.
Ice-Cream Cones

46. A Shift in Both Supply and Demand
Event
Effect on Price
Effect on Quantity
Demand increases Up
Supply decreases
Down
Both
Ambiguous

47. A Shift in Both Supply and Demand

48. Prediction exercises
Effect of a rise in the price of oil on the market for
Hybrid cars
Real estate
Staple foods (corn, wheat, rice)
Effect of the development of cheaper and better batteries for electric cars on the market for
traditional cars
gas

49. Maximum and Minimum Prices

50. Maximum Prices
Governments can legally set a maximum price in a market that suppliers cannot go above.
To be effective a maximum price has to be set below the free market price.
The price for chicken is a good example of maximum price setting when a shortage of chicken threatens a very large rise in the free market price
Other examples include price controls on other necessary food products such as wheat flour, sugar, beef, etc.

51. Illustrating the effects of a maximum price
Chicken
Free Market Equilibrium
Supply Pe
Demand
Quantity of Chicken

52. Illustrating the effects of a maximum price
Chicken
Supply
Free Market Equilibrium Pe
P max
Price (Rent) Ceiling
Excess Demand
The Government can set a legally imposed maximum price in a market that suppliers cannot exceed – in an attempt to prevent the market price from rising above a certain level. To be effective a maximum price has to be set below the free market price.
Demand Q2 Q1
Quantity of Chicken

53. Black markets
A parallel market can occur when the normal market price is higher than a legally imposed price ceiling (or maximum price).
Black markets develop where there is excess demand (or a shortage) for a good/ service.
Some consumers are prepared to pay higher prices in black markets in order to get the goods or services they want.
When there is a shortage, higher prices act as a rationing device in the free market.

54. Potential black market for a good/ service
Price £s
Supply
Free Market Equilibrium P1
Red area is a potential black market* Pe
P max
Price Ceiling
Excess Demand
It is worth noting that a price ceiling set above the free market equilibrium price would have no effect whatsoever on the market – because for a price floor to be effective, it must be set below the normal market-clearing price.
Demand Q3 Q2 Q1
Quantity

55. Examples of black markets
Tickets for major sporting events, rock concerts
Black markets for children’s toys and designer products that are in scarce supply
Black markets in the illegal distribution and sale of computer software products and pirated DVDs and music (the maximum price is zero! Or even negative if you include fines.)

56. Minimum prices
Governments can legally set a minimum price in a market that suppliers cannot go below.
To be effective the minimum price has to be set above the normal equilibrium price
A good example of this is the minimum wage in Malaysia
The main adult rate for the minimum wage in the Peninsular Malaysia is now RM4.33 per hour, Sabah and Labuan RM3.70 per hour, Sarawak RM3.75 per hour.

57. Illustrating the effects of a minimum price
Wage Rate (W)
Labour Supply
Excess supply of labour due to the minimum wage
Wmin
Minimum Wage (Wage Floor) We
A minimum price is a legally imposed price floor below which the normal market price cannot fall. To be effective the minimum price has to be set above the normal equilibrium price
Excess unemployed willing to work
Demand for Labour E3 Ee E1
Employment of Labour (E)

58. Main justifications for the minimum wage
The equity justification:
Fair rate of pay commensurate with the skills and experience of an employee
To encourage unemployed people to start looking for work
To reduce labour market discrimination/ exploitation
To offset some of the effects of persistent discrimination of many low-paid female workers and younger employees

59. Disadvantages of a minimum wage
Competitiveness and Jobs:
A minimum wage may cost jobs because a rise in labour costs makes it more expensive to employ people.
Effect on relative poverty:*
The greatest risk of relative poverty is among the unemployed, elderly and single parent families where the parent is not employed. They don’t benefit from the NMW
Rising prices due to supply costs increase

60. Elasticity of Demand And Supply

61. Price Elasticity of Demand
Definition:
Law of demand tells us that consumers will respond to a price drop by buying more, but it does not tell us how much more. The degree of sensitivity of consumers to a change in price is measured by the concept of price elasticity of demand.
Price elasticity formula: Ed = percentage change in Qd / percentage change in Price.
If the percentage change is not given in a problem, it can be computed using the following formula:
Percentage change in Qd = (Q1-Q2) / [1/2 (Q1+Q2)] where Q1 = initial Qd, and Q2 =  new Qd.
Percentage change in P = (P1-P2) / [1/2 (P1 + P2)] where P1 = initial Price, and P2 = New Price.
Putting the two above equations together:
Ed = {(Q1-Q2) / [1/2 (Q1+Q2)] } / {(P1-P2) / [1/2 (P1 + P2)]}
Because of the inverse relationship between Qd and Price, the Ed coefficient will always be a negative number. But, we focus on the magnitude of the change by neglecting the minus sign and use absolute value
Examples:
1.  If the price of Product A  increased by 10%,  the quantity demanded decreased by 20%. Then the coefficient for  price elasticity of the demand of Product A is:
Ed = percentage change in Qd / percentage change in Price = (20%) / (10%) = 2
2. If the quantity demanded of Product B has decreased from 1000 units to 900 units as price increased from $2 to $4 per unit, the coefficient for Ed is:
Ed = {(Q1-Q2) / [1/2 (Q1+Q2)] } / {(P1-P2) / [1/2 (P1 + P2)]} = {( ) / 1/2( )} / {(2 - 4) / 1/2 (2+4)} =
Take the absolute value of , Ed = 0.16

62. Characteristics:
Ed approaches infinity, demand is perfectly elastic. Consumers are very sensitive to price change.
Ed > 1, demand is elastic. Consumers are relatively responsive to price changes.
Ed = 1, demand is unit elastic. Consumers’ response and price change are in same proportion.
Ed < 1, demand is inelastic. Consumers are relatively unresponsive to price changes.
Ed approaches 0, demand is perfectly inelastic. Consumers are very insensitive to price change.
Ed is usually greater in the higher price range than in lower price range. Demand is more elastic in upper left portion of the demand curve than in the lower right portion of the curve. However, it is impossible to judge elasticity of a demand curve by its flatness or steepness. Along a linear demand curve, its elasticity changes. This relationship is demonstrated in the following example:

63. An Example DEMAND FUNCTION FOR PRODUCT X: P = 2.5-0.01Q
P = PRICE; Q = QUANTITY, TR = TOTAL REVENUE
Ed = PRICE ELASTICITY OF DEMAND
          A     B      C       D       E        F        G        H         I        J
Q:       0    50   100    150   200    250    300   350   400   450
P:       4.5   4     3.5     3       2.5       2       1.5      1      0.5      0
Ed:      17    5     2.6   1.57       1     0.64   0.38    0.2    0.06
ELASTICITY OF DEMAND;
FROM A TO E Ed >1
FROM E TO F Ed =1
FROM F TO J Ed <1

64. Determinants of Price Elasticity of Demand
Various factors influence the price elasticity of demand. Here are some of them:
1. # of Substitutes: If a product can be easily substituted, its demand is elastic, like Gap's jeans. If a product cannot be substituted easily, its demand is inelastic, like gasoline.
2. Luxury Vs Necessity: Necessity's demand is usually inelastic because there are usually very few substitutes for necessities. Luxury product, such as leisure sail boats, are not needed in a daily bases. There are usually many substitutes for these products. So their demand is more elastic.
3. Price/Income Ratio: The larger the percentage of income spent on a good, the more elastic is its demand. A change in these products' price will be highly noticeable as  they affect consumers' budget with a bigger magnitude. Consumers will respond by cutting back more on these product when price increases. On the other hand, the smaller the percentage of income spent on a good, the less elastic is its demand.
4. Time lag: The longer the time after the price change, the more elastic will be the demand. It is because consumers are given more time to carry out their actions. A 1-day sale usually generate less sales change per day as a sale lasted for 2 weeks.

65. Total Revenue Test
Total revenue (TR) is calculated by multiplying price (P) per unit and quantity (Q) of the good sold.
TR = P x Q
The total revenue test is a method of estimating the price elasticity of demand. As Ed will impact the total revenue, we can estimate the Ed by looking at the movement of the total revenue.
Total Revenue Test
Ed > 1, total revenue will decrease as price increases. P and TR moves in opposite directions. Producers can increase total revenue ( TR = Price x Quantity) by lowering the price. Therefore, most department stores will have sales to attract customers. Apparel's demand is elastic.
Ed < 1, total revenue will increase as price increases. P and TR moves in the same direction. Producers can increase total revenue by raising the price. Inelastic demand for agricultural products helps to explain why bumper crops depress the prices and total revenues for farmers.
You may look at the movement of TR in the example below. It demonstrated the relationship described above.

66. TR Test Example DEMAND FUNCTION FOR PRODUCT X: P = 2.5-0.01Q
P = PRICE; Q = QUANTITY, TR = TOTAL REVENUE
Ed = PRICE ELASTICITY OF DEMAND
          A      B       C       D       E        F        G        H         I        J
Q:       0     50        150     200    250    300   350   400   450
P:       4.5    4     3.5       3        2.5       2       1.5      1      0.5      0
TR:      0    200    350     450      500    500    450   350    200     0
Ed:         17     5      2.6      1.57       1     0.64    0.38    0.2    0.06
ELASTICITY OF DEMAND;
FROM A TO E Ed >1     TR increases
FROM E TO F Ed =1      TR remains same.
FROM F TO J Ed <1       TR decreases.

67. Price Elasticity of Supply
Definition:
Law of supply tells us that producers will respond to a price drop by producing less, but it does not tell us how much less. The degree of sensitivity of producers to a change in price is measured by the concept of price elasticity of supply.
Price elasticity formula: Es = percentage change in Qs / percentage change in Price.
If the percentage change is not given in a problem, it can be computed using the following formula:
Percentage change in Qs = (Q1-Q2) / [1/2 (Q1+Q2)] where Q1 = initial Qs, and Q2 =  new Qs.
Percentage change in P = (P1-P2) / [1/2 (P1 + P2)] where P1 = initial Price, and P2 = New Price.
Putting the two above equations together:
Es = {(Q1-Q2) / [1/2 (Q1+Q2)] } / {(P1-P2) / [1/2 (P1 + P2)]}
Because of the direct relationship between Qs and Price, the Es coefficient will always be a positive number.
Examples:
1.  If the price of Product A  increased by 10%,  the quantity supplied increases by 5%. Then the coefficient for  price elasticity of the supply of Product A is:
Es = percentage change in Qs / percentage change in Price = (5%) / (10%) = 0.5
2. If the quantity supplied of Product B has decreased from 1000 units to 200 units as price decreases from $4 to $2 per unit, the coefficient for Es is:
Es = {(Q1-Q2) / [1/2 (Q1+Q2)] } / {(P1-P2) / [1/2 (P1 + P2)]} = {( ) / 1/2( )} / {(4-2) / 1/2 (4+2)} = 2

68. Characteristics & Determinants
Es approaches infinity, supply is perfectly elastic. Producers are very sensitive to price change.
Es > 1, supply is elastic. Producers are relatively responsive to price changes.
Es = 1, supply is unit elastic. Producers’ response and price change are in same proportion.
Es < 1, supply is inelastic. Producers are relatively unresponsive to price changes.
Es approaches 0, supply is perfectly inelastic. Producers are very insensitive to price change.
It is impossible to judge elasticity of a supply curve by its flatness or steepness. Along a linear supply curve, its elasticity changes.
Determinants:
1. Time lag: How soon the cost of increasing production rises and the time elapsed since the price change influence the Es. The more rapidly the production cost rises and the less time elapses since a price change, the more inelastic the supply. The longer the time elapses, more adjustments can be made to the production process, the more elastic the supply.
2. Storage possibilities: Products that cannot be stored will have a less elastic supply. For example, produces usually have inelastic supply due to the limited shelf life of the vegetables and fruits.

69. Cross Elasticity of Demand
Definition:
Cross elasticity (Exy) tells us the relationship between two products. it measures the sensitivity of quantity demand change of product X to a change in the price of product Y.
Formula: Exy = percentage change in Quantity demanded of X / percentage change in Price of Y.
If the percentage change is not given in a problem, it can be computed using the following formula:
Percentage change in Qx = (Q1-Q2) / [1/2 (Q1+Q2)] where Q1 = initial Qd of X, and Q2 =  new Qd of X.
Percentage change in Py = (P1-P2) / [1/2 (P1 + P2)] where P1 = initial Price of Y, and P2 = New Price of Y.
Putting the two above equations together:
Exy = {(Q1-Q2) / [1/2 (Q1+Q2)] } / {(P1-P2) / [1/2 (P1 + P2)]}
Characteristics:
Exy > 0,  Qd of X and Price of Y are directly related. X and Y are substitutes.
Exy approaches 0, Qd of X  stays the same as the Price of Y changes. X and Y are not related.
Exy < 0, Qd of X and Price of Y are inversely related. X and Y are complements.
Examples:
1. If the price of Product A  increased by 10%,  the quantity demanded of B increases by 15 %. Then the coefficient for the cross  elasticity of the A and B is :
Exy = percentage change in Qx / percentage change in Py = (15%) / (10%) = 1.5 > 0, indicating A and B are substitutes.
2. If the price of Product A  increased by 10%,  the quantity demanded of B decreases by 15 %. Then the coefficient for the cross  elasticity of the A and B is :
Exy = percentage change in Qx / percentage change in Py = (- 15%) / (10%) = < 0, indicating A and B are complements.

70. Income Elasticity of Demand
Definition:
Income elasticity of demand (Ey, here y stands for income) tells us the relationship a product's quantity demanded and income. It measures the sensitivity of quantity demand change of product X to a change in income.
Price elasticity formula: Ey = percentage change in Quantity demanded / percentage change in Income
If the percentage change is not given in a problem, it can be computed using the following formula:
Percentage change in Qx = (Q1-Q2) / [1/2 (Q1+Q2)] where Q1 = initial Qd, and Q2 =  new Qd.
Percentage change in Y = (Y1-Y2) / [1/2 (Y1 + Y2)] where Y1 = initial Income, and Y2 = New income.
Putting the two above equations together:
Ey = {(Q1-Q2) / [1/2 (Q1+Q2)] } / (Y1-Y2) / [1/2 (Y1 + Y2)]
Characteristics:
Ey > 1,  Qd and income are directly related. This is a normal good and it is income elastic.
0< Ey<1,  Qd and income are directly related. This is a normal good and it is income inelastic.
Ey < 0, Qd and income are inversely related. This is an inferior good.
Ey approaches 0, Qd   stays the same as income changes, indicating a necessity.
Example:
If income  increased by 10%,  the quantity demanded of a product increases by 5 %. Then the coefficient for the income  elasticity of demand for this product is::
Ey = percentage change in Qx / percentage change in Y = (5%) / (10%) = 0.5 > 0, indicating this is a normal good and it is income inelastic.