There are different types of goods in the market and each has its characteristics. The demand for some goods increases when the consumer’s income rises while the demand for others falls. It mainly depends on the utility derived from the consumption of the good.
These goods are the opposite of normal goods and are known as inferior goods. Their demand falls when the consumer’s income increases and they become a necessity when the income decreases.
Definition of an Inferior Good
In economics, the inferior good is a term used to describe a good whose demand decreases when the consumer’s income rises and increases when the income falls. It is the opposite of a normal good, for which demand increases when income rises.
Inferior goods are essential for low-income earners as they spend a large proportion of their income on them. Necessities such as food and clothing would fall into this category.
On the other hand, luxury items such as cars and jewelry would be considered normal goods since the demand for them increases as income rises.
Understanding how income and consumption patterns change with different types of goods can help businesses better assess customer needs and make strategic decisions about their product offerings.
How inferior goods work
Consumer behavior hugely matters in inferior goods. The law of demand applies to inferior goods as well, where the demand for a good decreases when the price increases.
However, what’s different is that the demand for an inferior good falls when the consumer’s income rises and vice versa. So, while a high price would lead to a decrease in demand for a normal good, the same would cause an increase in demand for an inferior good.
For example, let’s say that you are a low-income earner and spend a large proportion of your income on food. As your income rises, you will likely buy more expensive and better quality food, and as a result, the demand for inferior goods (in this case, cheaper food) falls.
However, if your income falls, you will not be able to afford the same quality of food and will have to switch back to the inferior good. This is why inferior goods are often seen as necessities for low-income earners.
It also depends on the geological location. The demand for an inferior good in a developed country would be different from that in a developing country.
This is because the income levels and standard of living are generally higher in developed countries, which means that people can afford to buy better quality goods. As a result, the demand for inferior goods is usually lower in developed countries than in developing countries.
Examples of Inferior Goods
There are many examples of inferior goods in the market but here are some of the most common ones:
- Cheap clothing: Low-income earners often buy cheap clothes as they cannot afford to buy expensive ones. As their income rises, they will likely switch to better quality clothes.
- Generic brands: These are usually cheaper than name brands and are often bought by people on a budget. As income rises, people will likely switch to name brands.
- Fast food: This is often seen as an inferior good as it is relatively cheap and is often bought by people on a tight budget. As income rises, people will likely switch to healthier and more expensive options.
- Used cars: These are often bought by people who cannot afford new cars. As income rises, people will likely switch to buying new cars.
- Public transportation: This is often seen as an inferior good as it is relatively cheap and is often used by people who cannot afford to own a car. As income rises, people will likely switch to private transportation options such as cars or taxis.
Inferior goods vs. normal goods
For comparison, read this article about normal goods.
Conclusion
Inferior goods are an important concept in economics as they help us understand how consumer behavior changes with different types of goods. It is also helpful for businesses to understand how income and consumption patterns change with different types of goods so that they can make better strategic decisions about their product offerings.
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