When a consumer is never saturated with a commodity and would always prefer more to less, then such a commodity is referred to as ‘economic good‘ or simply ‘good’. On the contrary, by ‘economic bad’ or just ‘bad’ we mean a commodity for which less is preferred to more.
The consumer is not only saturated with such commodities, but also gets negative utility or disutility.
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Therefore, marginal utility is positive for ‘economic goods’, while it is negative for ‘economic bads’. On the other hand, goods with zero marginal utility are called ‘neutrals’ or ‘neuters’. It is however possible that ‘neuters’ may turn ‘bad’ beyond a certain level of consumption.
A commodity may be an ‘economic good’ upto a point and then becomes ‘neutral’ or even ‘economic bad’. For instance, initial glasses of water may yield positive marginal utility to the consumer, while successive glasses of water may ultimately turn out to be economic bads on account of their negative marginal utilities.
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However, there are some commodities which are almost ‘bad’ altogether from the very first unit of consumption, e.g., pollution, passive smoking, unhygienic sanitation, garbage dumps, traffic congestion, etc., similarly, income is almost ‘good’ altogether.
The difference between ‘economic good’ and ‘economic bad’ may also depend upon the nature of an individual. One who likes silence prefers more silence to less, while one who likes noise may prefer more noise to less.
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In the former case, silence is ‘economic good’, while noise is ‘economic bad’. Reverse is the situation in the latter case. Fig. 5.13 illustrates the shapes of indifference curves in four possible situations. The centre of concentric circles in this figure is called the ‘point of bliss’. As more of ‘X’ and ‘Y’ are consumed, the goodness of the good declines, while the badness of the ‘bad’ increases.
In region I, both commodities ‘X’ and ‘Y’ are ‘economic goods’. Thus, indifferences curves have normal shape (i.e., downwards sloping from left to right) and properties. The preference direction of the indifference curve is North-East. In region II, commodity ‘X’ is ‘economic bad’; while commodity ‘Y’ is an ‘economic good’ and so indifference curves are upward sloping. In region III, ‘X’ is an economic good’, while ‘Y’ is an ‘economic bad’.
In region IV, both the commodities are ‘economic bads’ and indifference curves slope downward. In regions II, III and IV, the preference direction is North-West, South-East and South-West respectively. These cases can be discussed in detail separately, particularly those of regions II, III and IV.
If commodity ‘X’ is ‘economic bad’ (say, pollution) and commodity ‘Y’ is ‘economic good’ (say, income), the indifference curve with these two commodities will be upward sloping from left to right (Fig. 5.14).
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If consumption of ‘X’ is increased, total satisfaction of the consumer will fall, since it is ‘economic bad’. In order to compensate the consumer for this additional pollution (addition in commodity ‘X’), his income (commodity ‘Y’ which is an economic good) will have to be raised, so that his total satisfaction remains unchanged. In this way, he remains on the same indifference curve IC1,. The preference direction of this upward sloping curve is north-west.
Here, if the amount of ‘X’ is held constant and that of ‘Y’ increases, the total satisfaction rises and the consumer moves to a higher indifference curve IC2, above and to the north-west of IC,. More income combined with the same level of pollution as on point ‘A’ on IC, would provide a higher level of satisfaction at point ‘B’ on indifference curve IC2 than at point ‘A’ on indifference curve IC1.
Further, if the level of income remains constant and pollution level increases or the pollution level remain the same and the level of income falls, the consumer will shift to a lower indifference curve IC0 at point C1 and C2 respectively in the two cases.
With commodity ‘X’ as ‘economic bad’ and commodity ‘Y’ as ‘economic good’, the slope of the indifference curve increases as we travel up the indifference curve. So, marginal rate of substitution increases implying concavity of indifference curves. The slope of the curve and hence MRSX,Y is positive.
If commodity ‘X’ is an ‘economic good’ and commodity ‘Y’ is an ‘economic bad’, the indifference curves are once again upward sloping. An increase in amount of amount of commodity ‘Y’ needs to be compensated by rise in amount of commodity ‘X’ so as to keep total satisfaction unchanged.
The preference direction of this indifference curve is south-east. Holding the quantity of commodity ‘F’ constant and raising that of commodity ‘X’ will shift the consumer to higher and higher indifference curves IC2, IC3 and so on in the south-east direction, as shown in Fig. 5.15. The slope of the indifference curve decreases, as the consumer moves up on a given indifference curve.
Therefore, MRSX,Y is diminishing implying that an increase in ‘Y’ is to be off-set by a larger and larger increments of ‘X’. This results in convexity of the indifference curves. Further, since slope at each point on the indifference curve is positive, hence MRS is also positive.
When commodities ‘X’ as well as ‘Y’ are ‘economic bads’ indifference curves will be downward sloping. If the consumption of one commodity (say, X) is increased, the consumption of the other commodity must fall so that utility (satisfaction) loss on account of increased consumption of ‘X’ is compensated.
The preference direction of this indifference curve is south-west. This implies that decrease in the consumption of ‘X’ or/and ‘Y’ will increase the total satisfaction level, as shown in Fig. 5.16. Since, slope of the indifference curve dY/dX is negative, so MRSX Y = – dY/dX. As the consumer travels down an indifference curve, the slope decreases and hence marginal rate of substitution rises. This means that indifference curve is concave and so equal successive reduction in amount of ‘Y’ will have to be compensated by successively smaller and smaller increments in ‘X’.
Though most of the commodities are either ‘economic good’ or ‘economic bad’, it is possible to think of ‘neutral commodities’, which do not provide any satisfaction to the consumer. If a consumer in India is not at all affected by the rainfall in Antarctica, then rainfall in Antarctica is a neutral good for a consumer in India.
Here, the consumer will not be prepared to give up any income for more/less rainfall in Antarctica. The indifference curve in this situation is a horizontal line, if neutral good is shown on the X-axis. In Fig. 5.17(a), income is taken along the y-axis and rainfall in Antarctica is shown along the X-axis. For a given level of income, the satisfaction of the consumer will remain the same irrespective of the magnitude of rainfall in Antarctica. In this case, the marginal rate of substitution is zero.
When the income of the consumer in India increases, his level of satisfaction rises and he will move from indifference curve IC, to a higher indifference curves IC2. If, however, ‘economic good’ is taken on the X- axis and ‘neutral’ on the Y-axis, then the indifference curve will be a vertical straight line.
This curve would move towards the right, as the quantity of the ‘economic good’ increases, indicated by higher indifference curves IC2 and IC3, to the right of IC1 (Fig. 5.17(b)) the commodity can also become neutral after some units (OX1 or OY1) are consumed (Fig. 5.17(c).
