What is an 'Inferior Good'
An inferior good is a type of good for which demand declines as the level of income or real GDP in the economy increases. This occurs when a good has more costly substitutes that see an increase in demand as the society's economy improves. An inferior good is the opposite of a normal good, which experiences an increase in demand along with increases in the income level. Inferior goods can be viewed as anything a consumer would demand less of if they had a higher level of real income.
BREAKING DOWN 'Inferior Good'Demand for inferior goods decreases as income increases or the economy improves. Conversely, demand for inferior goods increases when income falls or the economy contracts. It is important to note that the term inferior does not necessarily relate to the quality of the good. Although inferior goods can be lower quality or less convenient to a consumer, this is not always the case. Simply put, inferior goods are a more affordable substitute for a more expensive good, and there may or may not be a quality difference.
Examples of Inferior Goods
There are many of examples of inferior goods. Coffee is a good example. A McDonald’s coffee can be an inferior good compared to Starbucks coffee. When a consumer's income drops, he may substitute his daily Starbucks coffee for a more affordable McDonald’s coffee. On the other hand, when a consumer's income rises he may substitute his McDonald's coffee for the more expensive Starbucks coffee. Another example of an inferior good is off-brand grocery store products such as cereal or peanut butter. Consumers may use the cheaper off-brand products when their incomes are lower, and make the switch to name brand products when their incomes increase. Off-brand grocery store products provide an insightful example of how inferior goods are not necessarily lower quality. Many of the off-brand goods in the grocery store come from the exact same product line as the more expensive name-brand goods.
With inferior goods, it is important to note that there is an element of consumer behavior that determines a good to be inferior. There may be some consumers who do not reduce their purchases of inferior goods when their income increases. Perhaps a consumer likes McDonald's coffee better than Starbucks, or they may like an off-brand grocery product better than the more expensive name-brand counterpart. When comparing the overall population, however, the demand for inferior goods will decrease when the economy improves and increase when the economy stalls or contracts.