What Is an Inferior Good?
An inferior good is an economic term that describes a good whose demand drops when people's incomes rise. These goods fall out of favor as incomes and the economy improve as consumers begin buying more costly substitutes instead.
- 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.
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.
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.
Conversely, the demand for inferior goods increases when incomes fall or the economy contracts. When this happens, inferior goods become a more affordable substitute for more expensive goods.
The term "inferior good" refers to affordability, rather than quality, even though some inferior goods may be of lower quality.
Inferior Good Examples
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, hamburgers, canned goods, and frozen dinners. When people have less money, they tend to buy these kinds of products. But when their incomes rise, they often give these up for more expensive items.
Coffee is another good example. A McDonald’s coffee may be an inferior good compared to a Starbucks coffee. When a consumer's income drops, they may substitute their daily Starbucks java for the more affordable McDonald’s brew. On the other hand, when a consumer's income rises, they may substitute their 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 these cheaper generic 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 of 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, take taxis or even buy cars.
Inferior Goods and Consumer Behavior
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. But that isn't always the case. Some customers may not change their behavior and continue to purchase inferior goods.
Consider a consumer who gets a raise from their employer. Despite the rise in income, they may continue to buy McDonald's coffee because they prefer it over Starbucks' brew, or they 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 are associated with a negative income elasticity, while normal goods are related to a positive income elasticity.
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 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.
Many Giffen goods are considered staples, especially in areas where people live in a lower socio-economic 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.
Inferior Goods vs. Normal Goods and Luxury Goods
An inferior good is the opposite of a normal good. Normal goods experience 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, they may buy regular bananas. But if their incomes rise and they have a few extra dollars to spend each month, they may choose to buy organic bananas. Other examples include clothing, water, and beer, and alcohol.
Luxury goods are the third category. They are not deemed essentials or necessities to live. 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.
Do Inferior Goods Have an Inferior Quality?
Not necessarily. "Inferior good" is an economic term that refers to an item that becomes less desirable as the income of consumers increases. 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.
What Are Some Examples of 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.
What is the Difference Between a Giffen Good and an Inferior Good?
The term Giffen goods, named after the Scottish economist Sir Robert Griffin, refers to goods whose demand increases even if prices rise, largely because there are few substitutes or alternatives for them. A classic example of a Giffen Good would be a basic food staple, such as rice. If consumers have no choice but to purchase the staple, they will continue to do so, even if it becomes more expensive. In fact, because these purchases will consume a greater share of their income, demand for Giffen goods will actually increase with higher prices: The limits on disposable income make slightly higher options even more out of reach.