An economist for a bicycle company predicts that, other things equal, a rise in consumer incomes will increase the demand for bicycles. This prediction is based on the
assumption that:
The economist's prediction is based on the assumption that bicycles are normal goods. Normal goods are products whose demand increases as consumer incomes rise, indicating that they are considered desirable or essential items. To understand this assumption, we need to examine the relationship between consumer incomes and the demand for bicycles.
One way to determine the relationship between consumer incomes and the demand for bicycles is by studying the concept of income elasticity of demand. Income elasticity of demand measures the responsiveness of the quantity demanded of a product to a change in consumer income.
If the income elasticity of demand for bicycles is positive, it means that bicycles are normal goods, and an increase in consumer incomes will lead to an increase in the demand for bicycles. This implies that as people's incomes rise, they have more disposable income to spend on various goods and services, including bicycles. As a result, the demand for bicycles is expected to increase because people have more purchasing power.
Conversely, if the income elasticity of demand for bicycles is negative, it means that bicycles are inferior goods. In this case, as consumer incomes rise, the demand for bicycles would actually decrease because people would prefer to purchase more expensive and higher-quality transportation alternatives.
Therefore, the economist's prediction that a rise in consumer incomes will increase the demand for bicycles is based on the assumption that bicycles are normal goods and have a positive income elasticity of demand.