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.
It's important to note that inferior goods aren't always the same in different parts of the world. For example, something as simple as fast food may be considered as an inferior good in the U.S., but for developing economies, fast food may be deemed a normal good. A normal good is one whose demand increases when people's incomes start to increase, giving it a positive income elasticity of demand.
Examples of Inferior Goods
There are many of examples of inferior goods. Some of us may be more familiar with some of the everyday inferior goods we come into contact with, including instant noodles, hamburger, canned goods and frozen dinners. When people have lower incomes, they tend to buy these kinds of projects. But when their incomes rise, they will likely leave these behind for more expensive items.
Coffee is also 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 store 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 same product line as the more expensive name-brand goods.
Another example comes from transportation. When people's incomes are low, they may opt to ride public transport. But when their incomes rise, they may stop riding the bus and buy vehicles.
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 she may find 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.