What Is an Inferior Good?
An inferior good is an economic term that describes a good whose demand drops when people's incomes rise. This occurs when a good has more costly substitutes that see an increase in demand as incomes and the economy improve.
Inferior goods—which are the opposite of normal goods—are anything a consumer would demand less of if they had a higher level of real income. They may also be associated with those who typically fall into a lower socio-economic class.
Inferior goods are associated with a negative income elasticity, while normal goods are related to a positive income elasticity.
It's important to note that the term inferior good refers to its affordability, rather than its quality, even though some inferior goods may be of lower quality.
Understanding Inferior Goods
In economics, the demand for inferior goods decreases as income increases or the economy improves. 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.
Conversely, demand for inferior goods increases when incomes fall or the economy contracts. When this happens, inferior goods become a more affordable substitute for a more expensive good. Most often than not, there is not a quality difference.
Examples of Inferior Goods
There are many 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 products. But when their incomes rise, they often give these up for more expensive items.
Coffee is also a good example. A McDonald’s coffee may be an inferior good compared to a Starbucks coffee. When a consumer's income drops, he may substitute his daily Starbucks coffee for the 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.
Other examples of an inferior good are no-name 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. Grocery store brand products provide an insightful example of how inferior goods are not necessarily lower quality. Many of these goods come from the same product line as the more expensive name-brand goods.
We can also turn to transportation as an example of an inferior good. 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, instead, buy vehicles.
- An inferior good is one whose demand drops when people's incomes rise.
- When incomes are low or the economy contracts, inferior goods become a more affordable substitute for a more expensive good.
- Inferior goods are the opposite of normal goods, whose demand increases even when incomes increase.
Inferior Goods and Consumer Behavior
Demand for inferior goods is typically 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. But that isn't always the case. Some consumers may not change their behavior, and they continue to purchase inferior goods.
Consider a consumer who gets a raise from her employer. Despite the rise in income, she may continue to buy McDonald's coffee because she prefers it over Starbucks, or she may find a no-name grocery product better than the more expensive name-brand counterpart. In this case, it's just a matter of personal preference.
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.
Inferior Goods and Giffen Goods
Giffen goods are rare forms of inferior goods that have no ready substitute or alternative such as bread, rice, and potatoes. The only difference from traditional inferior goods is that demand increases even when their price rises, regardless of a consumer's income.
Many Giffen goods are considered staples, especially in areas where people live in a lower socio-economic class. When their prices increase, consumers must 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 like meat, on the other hand, become luxuries, as they are far too unaffordable and out of reach.
Inferior Goods vs. Normal and Luxury Goods
An inferior good is the opposite of a normal good. A normal good sees an increase in demand when incomes increase. Normal goods are also called necessary goods. An example is organic bananas. If a consumer's income is low, he may buy regular bananas. But if he has a few extra dollars to spend each month, he may choose to buy organic bananas. Other examples include clothing, water, and beer and alcohol.
Luxury goods, on the other hand, are not deemed a necessity to live. These goods are highly-desired and can be purchased when a consumer's income rises. So the ability to purchase luxury goods is dependent on a consumer's income or assets. Luxury items include cleaning and cooking services, handbags and luggage, certain automobiles, and haute couture.