Suppose an economic boom causes incomes to increase. This will cause the demand for most goods and services to increase. The extent and direction of the change in demand will depend on the nature of the goods or services in question. Let's break this down:
- Normal Goods: For normal goods, an increase in income will lead to an increase in the quantity demanded, ceteris paribus (all other things being equal). This is because people can now afford to buy more of these goods. Examples of normal goods could include clothing, electronics, and restaurant meals.
- Inferior Goods: For inferior goods, an increase in income could lead to a decrease in the quantity demanded. Inferior goods are those for which demand decreases as income increases, ceteris paribus. Examples might include budget or no-brand products, which people might buy less of as their income increases because they can now afford higher-quality substitutes.
- Luxury Goods: These are a subset of normal goods for which demand might increase more than proportionally as income increases. Luxury items like high-end cars, designer clothing, and expensive vacations might see a surge in demand as more people can now afford them.
- Interest Rates: If the economic boom is accompanied by inflationary pressures, central banks might raise interest rates to counteract this. Higher interest rates could deter borrowing and dampen spending on interest-sensitive goods like houses and cars. However, if inflation remains tame and interest rates stable, then this might not be a significant factor.
- Investment: Businesses might anticipate the increased demand for goods and services and could therefore increase their investments in capital goods to boost production capacity.
- Savings: While some people will increase their consumption as their income grows, others might decide to save more, especially if they perceive the economic boom as temporary.
- Import and Export Dynamics: An increase in incomes and consumption might lead to an increase in imports if domestic production cannot meet the heightened demand or if foreign goods are perceived as more desirable. On the other hand, a booming economy might also increase the demand for the country's exports, potentially improving the trade balance, depending on the elasticity of demand for these exports.
- Government Revenue and Expenditure: With a booming economy and higher incomes, the government might collect more in taxes, especially if the tax system is progressive. This could lead to increased government spending or a reduction in public debt.
In sum, an economic boom leading to increased incomes generally results in an increased demand for goods and services. However, the actual outcome will vary based on various economic, societal, and individual factors.