What Are Inferior Goods And Normal Goods?

Besides, in the case of necessity goods, there is no change in its demand when the income of consumers increase or decrease. The goods whose demand reduces when there is an increase in the income of the 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.

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

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.

For example, in Africa, the second-hand business is a booming business which targets the low-income earners. On the other hand, chain stores like the Urban Outfitters have also sprung. Most governments will tax traders dealing with inferior goods more leniently as compared to those selling normal goods.

1. Inferior goods refer to items that have a negative elastic relationship with demand and wages.
2. A normal good is defined as having an income elasticity of demand coefficient that is positive, but less than one.
3. As a consumer’s income increases, the demand for the cheap cars will decrease, while demand for costly cars will increase, so cheap cars are inferior goods.
4. The goods whose demand does not change with a change in income of the consumer.
5. 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.
6. Inferior goods are goods for which demand actually declines as consumers’ real incomes rise, or rises as incomes fall.
7. For example, in Africa, the second-hand business is a booming business which targets the low-income earners.

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.

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.

A Veblen good is an item whose increase in price may actually result in higher sales. These types of goods are often a subset of a luxury good, and this type of good often defies many traditional concepts of economics. Should the artwork actually be valued at $1 million, theory holds that more investors would be interest as there is greater potential value.

Explanation with Examples of Inferior Goods

In addition, the way individuals consume food may be classified differently. Individuals may be less likely to eat out, especially at fancier example of inferior goods 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.

Brands

Giffen goods are rare forms of inferior goods that have no ready 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.

Example of Income Effect

Inferior goods are goods for which demand declines as consumers’ real incomes rise, or rises as incomes fall. Consumers with more money may opt to buy more expensive substitutes instead of what they could afford only when incomes were lower. Inferior goods are goods or services that are of lower quality or lower value compared to other goods or services in the same category.

What Is the Income Effect? Its Meaning and Example

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.

1. The term “inferior good” refers to affordability, rather than quality, even though some inferior goods may be of lower quality.
2. 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.
3. Many Giffen goods are considered staples, especially in areas where people live in a lower socioeconomic class.
4. Both will reach their destinations, but the person using the bus will do so at a lower cost.
5. Inferior goods are goods or services that are of lower quality or lower value compared to other goods or services in the same category.
6. Demand for inferior goods is commonly dictated by consumer behavior.
7. Products such as meat, on the other hand, become luxuries, as they are far too unaffordable and out of reach.

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.