19th Ave New York, NY 95822, USA

Inferior good Definition & Meaning

what is inferior good
what is inferior good

Necessary inferior goods are those that people must purchase due to financial constraints, such as Ramen noodles or generic brands. Discretionary inferior goods are items that people can buy but often opt for something else when their income increases, such as fast food or cheap clothing. The term “inferior good” describes a good for which demand decrease as incomes increase. They are the opposite of “normal goods,” which are goods for which demand increases as incomes increase (e.g. organic food, cars, or name-brand products). For example, if average incomes rise 10%, and demand for holidays in Blackpool falls 2%.

Goods and services can be categorized into two broad categories based on their demand with relation to a change in income. Normal goods are products and services that see a rise in demand when incomes rise. Inferior goods are products and services that see a decrease in demand as incomes rise. When the elasticity of a good rises above 1, it’s considered a luxury good and when it has a value of 0, it’s considered an essential item. The designation of inferior goods and normal goods does vary quite a bit based on income levels and consumer behavior.

Is something that people buy less of when their income goes up, which is the opposite of what happens with a normal good. Furthermore, of the normal goods, we divide them into two, based on the value of elasticity of goods, namely necessities and luxury goods. For example, a consumer that typically buys McDonald’s coffee may decide to switch to buying Starbucks. An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Where you sleep and eat, either in your normal life or when you travel, could be defined as an inferior good.

The substitution effect occurs due to a change in relative prices between two or more goods. For both normal and inferior goods, a price increase will lead to a reduction in quantity consumed of the good due to substitute goods being relatively cheaper. Consumers substitute the good in which the price has increased for either cheaper goods of the same observed quality or increase their consumption of other inferior goods. These goods are highly desired and can be purchased when a consumer’s income rises. In other words, the ability to purchase luxury goods is dependent on a consumer’s wealth or assets.

This demand curve decreases as it moves to the right because its demand drops as incomes rise. Clothing – Clothing is a necessary good for consumers and most clothing brands and labels fall into the normal goods group. The exclusions are the ultra-cheap clothing that are inferior goods and ultra-luxury brands which are considered luxury goods.

When this happens, consumers will be more willing to spend on more costly substitutes. Some of the reasons behind this shift may include quality or a change to a consumer’s socio-economic status. Inferior goods are a great example of how economics can affect consumer behavior. When people’s incomes rise, they purchase more expensive substitutes for inferior goods.

Most people choose inferior goods for economic reasons only. The elasticity number will range from for almost all goods, with the elasticity value of most goods being positive. Inelastic goods are products and services that don’t see a change in demand with a change in salaries. These goods are usually essential and often cannot be stockpiled. Goods that have an elasticity of more than 1 are luxury goods. Luxury goods have very high elasticity scores and are considered non-necessary goods.

What is an example of an Inferior Good?

A McDonald’s coffee, for example, maybe a lesser product than a Starbucks coffee. When a person’s income decreases, they might switch to the less expensive McDonald’s brew in place of their usual Starbucks coffee. When a person’s income increases, on the other hand, they may switch from their cheaper McDonald’s brew to the more expensive Starbucks coffee. A Giffen good occurs when the increase in the price of a superior substitute leads to a rise in demand for the inferior good. This happens because people with low incomes cannot afford the more expensive substitutes. As a result, they are forced to purchase inferior goods instead.

what is inferior good

A normal good refers to any good where there is a direct relationship between income changes and the demand curve. An inferior good is any good where there is an inverse relationship between changes in income and a demand curve. Most of Josie’s life has been a financial struggle, and she has had a high demand for inferior goods. Let’s start at that point in her life to illustrate an inferior good example. In economics, an inferior good is a good whose demand decreases when consumer income rises , unlike normal goods, for which the opposite is observed.

Marketing in Universities: Strategies for Success

Boxed and canned foods found at dollar stores along with low quality health products are two more examples of inferior goods. The goods whose demand reduces when there is an increase in the income of consumer are known as Inferior Goods. In simple terms, there exists an inverse relationship between the consumer’s income and demand for inferior goods. Consumers usually purchase inferior goods because they are essential for their life; like, coarse grains, etc.

  • Some examples are buying cereal, pulses and peanut butter from the grocery store that don’t have a brand name instead of buying from a supermarket.
  • This runs contrary to what most people think about economics.
  • When consumers earn more money, they typically spend more money on goods or indulge more in eating out and other leisure activities because they have a larger budget.
  • In economics, the demand for inferior goods decreases as income increases or the economy improves.

There is no set criteria of what constitutes an inferior good, but economists refer to an inferior good as any item preferred less when disposable consumer income increases. Income elasticity of demand measures the relationship between a change in the quantity demanded for a particular good and a change in real income. Many Giffen goods are considered staples, especially in areas where people live in a lower socio-economic class. When the prices of Giffen goods increase, consumers have no choice but to spend a larger amount of money on them. So they may spend more money on rice because that’s all they can afford to buy—even if the price keeps rising.

Brands

Inferior goods are often low-cost replacement goods that are seen as poorer quality. Consumers with lower incomes often purchase inferior goods to stretch their money. Examples of inferior goods are low-quality clothing, boxed and canned food and no-name brands of staple products. Normal goods are also called necessary goods because they are staple goods of better quality that most people consider necessary for modern life. Example are appliances, clothing, food staples and health products.

Income Elasticity of Demand

Because incomes vary, there is always a demand for inferior goods. If income stayed unchanged, demand for inferior goods could perhaps fall. A product class that is inferior for one set of individuals may be normal for another group while also being on time. Moreover, only the consumer’s spending power and priorities can ascertain which service or product is normal and which is inferior.

This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals. Information is from sources deemed reliable on the date of publication, but Robinhood does not guarantee its accuracy.

If you were to plot how consumer behavior changes in terms of income and consumption, you would see a visual representation of that relationship. In microeconomic theory, there is an assumption that people only buy as much as they can afford. If a person increases their income, that also increases their budget constraint. This includes understanding what people buy when they buy it and why they make their decisions. It’s also important to know how different economic factors influence people’s buying habits. When their income rises, they will ask for higher quality goods.

She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands. Consumers who have more disposable income might prefer to go out to eat at upscale establishments more frequently. Instead what is inferior good of grabbing fast food from a drive-thru restaurant, they might treat themselves to a steakhouse or a four-course dinner. With a price tag of $500, people might walk by the painting. But, with a price tag of $50,000, collectors might suddenly get more interested.

Even the McDonald’s outlets in the country replaced their traditional potato fries with yuca fries. Yuca is an inferior good, the demand for which rises in times of low incomes and economic hardship. Luxury goods are a separate category from inferior goods and normal goods. Luxury goods are goods that are not considered necessary to survive. People buy luxury goods not only when their incomes rise but when they have a good amount of wealth and assets to spend. Examples of luxury goods are Rolex watches, Lamborghinis, and fine art.

Coffee makers, ovens, microwaves, refrigerators and blenders are all examples of normal goods. There are many different examples of inferior goods, but the best examples are found in categories of goods instead of an individual good. The term “inferior good” refers to affordability, rather than quality, even though some inferior goods may be of lower quality. Full BioRobert Kelly is managing director of XTS Energy LLC, and has more than three decades of experience as a business executive. He is a professor of economics and has raised more than $4.5 billion in investment capital.

Leave a comment