Inferior Good: Definition, Examples, and Role of Consumer Behavior

An inferior good is a good for which the demand is inversely related to income, which means that if a person’s income increases, the demand for an inferior good will decrease. In the above graph, the income of the consumer is shown on Y-axis and the demand for a normal good (say, Refrigerator) is presented on X-axis. When there is an increase in the income from OY to OY1, then the demand for Refrigerator will also rise from OQ to OQ1.

Likewise, goods and services used by poor people for which richer people have alternatives exemplify inferior goods. Typical examples of inferior goods include “store-brand” grocery products, instant noodles, and certain canned or frozen foods. Although some people have a specific preference for these items, most buyers would prefer buying more expensive alternatives if they had the income to do so. Therefore, when incomes rise, demand for these items tends to decrease accordingly.

However, over time, most consumers have become cost conscious, and companies have come up to manufacture inferior goods as their primary products. Some countries like China are known for their production of such products, especially in electronics. On the other hand, countries like German and Japan are well known to produce normal and superior products, especially in the motor industry. A consumer will therefore easily be able to know where to purchase according to his purchasing power. The income effect and substitution effect are related economic concepts in consumer choice theory. As income increases, the demand for a product decreases, so the demand curve shifts to the left.

What Are Normal Goods?

Normal and inferior goods complement one another, yet they are also opposite of each other too. As explained above in the tutorial, goods that have an inverse relation are inferior goods. People buy more normal goods when their income is high and more inferior goods when their income is low.

Giffen Goods

Many Giffen goods are considered staples, especially in areas where people live in a lower socioeconomic 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. Products such as meat, on the other hand, become luxuries, as they are far too unaffordable and out of reach. One notable aspect that must be considered here is that inferior goods do not imply that the quality of the good is inferior.

Giffen goods are rare forms of inferior goods that have no ready example of inferior goods substitute or alternative, such as bread, rice, and potatoes. The only difference between Giffen goods and traditional inferior goods is that demand for the former increases even when their prices rise, regardless of a consumer’s income. Demand for inferior goods is commonly dictated by consumer behavior. Typically, demand for inferior goods is mainly driven by people with lower incomes or when there’s a contraction in the economy. Some customers may not change their behavior and continue to purchase inferior goods. A McDonald’s coffee may be an inferior good compared to a Starbucks coffee.

Consider a consumer who on an average day buys a cheap cheese sandwich to eat for lunch at work, but occasionally splurges on a luxurious hot dog. 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. Luxury items include cleaning and cooking services, handbags and luggage, certain automobiles, and haute couture. Normal goods experience an increase in demand when incomes increase. If their incomes rise and they have a few extra dollars to spend each month, they may choose to buy organic bananas.

In other words, inferior goods are those whose price elasticity is negative, but this doesn’t always involve a lower quality. As consumers’ incomes increase, they tend to decrease their purchases of inferior goods, opting for normal goods or luxury goods instead. The goods whose demand increases when there is an increase in the income of the consumer are known as Normal Goods. Besides, in general, consumers purchase more of normal goods when their income increases and purchase less of these goods when their income falls. For example, if demand for a Refrigerator increases with an increase in income, then the Refrigerator will be said to be a normal good.

1. The only difference between Giffen goods and traditional inferior goods is that demand for the former increases even when their prices rise, regardless of a consumer’s income.
2. If their incomes rise and they have a few extra dollars to spend each month, they may choose to buy organic bananas.
3. Inferior goods are goods for which demand declines as consumers’ real incomes rise, or rises as incomes fall.
4. This income change can be the result of a rise in wages etc., or because existing income is freed up by a decrease or increase in the price of a good that money is being spent on.
5. A Veblen good is an item whose increase in price may actually result in higher sales.
6. Therefore, in the case of normal goods and inferior goods, the demand curve of a given commodity changes with a change in income.

In addition, the way individuals consume food may be classified differently. Individuals may be less likely to eat out, especially at fancier restaurants, in favor of inferior methods of having food prepared such as preparing the meal at home on their own. The term “inferior good” refers to affordability, rather than quality, even though some inferior goods may be of lower quality.

The Role of Inferior and Normal Goods in Economics

For example, if the consumer’s income increases and he prefers to replace his Single-Door Refrigerator with French door style refrigerator, then the demand for Single-Door Refrigerator will fall. Also, in this case, the Single-Door Refrigerator is the Inferior Good. Economists have praised the classification of products as inferior or normal, arguing that it helps poorer consumers to enjoy utilities as would wealthier persons. For example, a low-income earner may buy for his kid a bicycle instead of a motorbike.

Inferior goods aren’t always the same in different parts of the world. For example, something as simple as fast food may be considered an inferior good in the U.S., but it may be deemed a normal good for people in developing nations. A normal good is one whose demand increases when people’s incomes start to increase, giving it a positive income elasticity of demand.

1. A quick primer on inferior goods where the income elasticity of demand following a change in real income will be negative.
2. Some countries like China are known for their production of such products, especially in electronics.
3. Luxury items include cleaning and cooking services, handbags and luggage, certain automobiles, and haute couture.
4. Inferior goods represent items that are simply in less demand as people have more disposable income.
5. However, critics have argued that there are so many factors that determine the demand for the commodity and not only the income of consumers and the value of the commodity.
6. Likewise, goods and services used by poor people for which richer people have alternatives exemplify inferior goods.

When the income of the consumers increases, they will opt for new clothes, and hence the demand for the second-hand clothes decreases. It is cheaper to use the bus services than to use air but it is also time-consuming. When the income increases, people will use transport since their disposable income is enough to allow such expenditure. On the other hand, normal goods refer to goods that their demand increases with the increase in the income of consumers. There is a particular class of inferior products which contravenes this law and is known as Giffen goods. For example, in Palestine, the price of potatoes is high due to low supply, but in Ireland, potatoes is considered a commodity for the poor and most people will try to avoid it.

Market Overview:

As one’s income grows, the income effect predicts that people will begin to demand more (and vice-versa). Inferior goods usually have more appealing substitutes, which consumers will switch to following a rise in income. For example, clothes from a thrift store and new clothes are substitutes. As income increases, consumers purchase new clothes and less from thrift stores, as shown below in a leftward shift from D1 to D2 of the demand for second-hand clothes from a thrift store.