Inferior Good (Economics) - Explained
What is an Inferior Good?
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What is an Inferior Good?
In economics, an inferior goods refers to a product that people buy less when their income increases. Simply put, any product whose demand falls when peoples income rise is called an inferior good. This usually occurs when this product has a substitute which commands more price and gets more demand when peoples income increase and the economy of a nation increases. Normal goods are the opposite of inferior goods. People less less of inferior goods when they have a larger amount of money. Most times, inferior goods are associated with people who have lower incomes in a nation, or persons who fall into the lower-class economy cycle. It is important that we dont confuse economic goods with non-quality goods, although some inferior goods are non-quality goods. Inferior products mainly go side to side with negative income elasticity, while normal goods go side to side with positive income elasticity.
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Why identifying Inferior Goods Important?
In economics, inferior goods experience a higher demand when the income level in the nation is low, and a lower demand when the income level is high. When the standard of living increases, people are more willing to spend more money on costly substitute to these products. The reason for this shift or these actions are not far from a change in the customers socio-economic class, or a need for higher quality in some cases. In a case where the standard of living drops, people will rush back to purchasing inferior goods, thus making demand higher and price stable. When this occurs, inferior goods become substitutes for costly products, however, the quality differences would be clear to the average consumer.
Types of Inferior Goods
There are different inferior goods which we keep and purchase daily. A typical example would be frozen foods. Others might include instant noodles, canned goods, hamburgers, and in some cases, fast food. People with lower income prefer to opt for these kind of products since theyre more budget friendly and quite affordable. We can also use coffee in determining what qualifies as an inferior good and what doesnt. Also, hamburger and steak is a perfect example. There is a belief that people would buy steak when they have larger income, and buy hamburger when they have a little less to live on. Also, in grocery shops, buying peanut butters without brand names can be associated with a lower standard of living. When people have a little less to spend, theyll prefer buying cheaper peanut butter without labels or brand name. On the other hand, people would want to buy peanut butter created by top brands when they have a higher income level. We can also use software and transportation to give good examples of inferior goods. Most people will opt for unpopular smartphones if they have a low standard of living. However, with increased income, they can opt for bigger brands like Apple and Samsung. This isnt always the case though. Also, in transportation, persons who cannot afford cars or vehicles are forced to either walk or take the bus. People with higher income can opt to buy a car if they no longer feel comfortable taking a bus.
Important Details on Inferior Goods
- Any product whose demand decline when customers have a higher standard of living is called an inferior good.
- In a case of poor standard of living or low income, inferior goods typically become the favorable substitutes of costly products.
- Inferior goods are the direct opposite of normal goods. Here, as income increase, demand decreases unlike what is seen with normal goods.
Consumer Behavior and Inferior Goods
The demand for inferior goods is primarily dependent on consumers behavior. Basically, inferior goods have a higher demand due to persons with lower standards of living or low income. In most cases, an unfavorable economic event can lead to higher demand of inferior goods. In some cases, customers can choose to stick with the so-called inferior goods even after having acquired higher income or raised their standard of living. For instance, take a female employee who gets an increase in salary from her employer. She might choose to stick to her $300 handbag instead of purchasing a $5000 Chanel bag because she is used to the $300 bag. This is true for some people even when their raise enables them to easily purchase a Chanel bag. Also, for someone who has been drinking McDonalds since time immemorial, transitioning to Starbucks wont sound like a good idea. Basically, inferior goods are created based on peoples sentiment, and not based on their quality, as more costly substitutes wont add additional value in most cases. Inferior goods cannot be tagged globally, as inferior goods in some nations are costly goods in others, and vice versa. For instance, most people consider fast food as inferior goods in the United States, whereas some countries see fast food as costly. Demand on a normal good increases with higher income level in a nation.
Differences Between Inferior Goods and Giffen Goods
Giffen goods are rarer inferior goods without substitutes or alternative products. Examples include; bread, rice, and wheat. The difference is that people purchase more of Giffen goods when their prices increases, despite their income level. A great number of Giffen goods are usually dietary staples usually in places where the people have a lower socioeconomic price. Take for instance bread and meat. If the price of bread keeps rising, people will continue to buy it, even in larger quantities since bread has no substitute in place. However, they wont buy meat, since it would be technically impossible for them to afford meat if they can hardly afford anything above bread.
The Differences Between Normal Goods, Inferior Goods, and Luxury Goods
Inferior goods are the opposite of normal goods, as demand for normal goods increase when the income level of consumers increase. It is accurate to call normal goods necessary commodities. Examples are cabbage and tomatoes. A person with low income might choose to stick with frozen or regular cabbages, and transition to organic cabbages when he has a higher income to spare. Other examples are water, clothing, and drinks. Luxury goods on the other hand are mostly desires and wants that do not necessarily need to be fulfilled. People usually love these goods, and theyre willing to purchase them when their income increases. In other words, purchasing luxury goods is solely based on what the consumer can afford and not on the economic level of the nation. Examples of luxury commodities include, but are not limited to designer clothings, handbags and luggages, high-end automobiles and smartphones, cooking services, cleaning services and several others.
- Self Interest
- Cost-Benefit Analysis
- Enlightened Self-Interest
- Fisher's Separation Theorem
- Ratchet Effect
- Total Utility (Economics)
- Efficiency Principle
- Expected Utility
- Subjective Theory of Value
- Positional Goods
- Indifference Curve
- Time Preference Theory of Interest
- Marginal Benefit
- Diminishing Marginal Utility
- Sunk Costs
- Production Possibilities Frontier
- Law of Diminishing Returns
- Economic Efficiency
- Efficiency Theory
- Productive Efficiency
- Capacity Utilization Rate
- Allocative Efficiency
- Pareto Efficient
- Comparative Advantage
- Criticisms of the Economic Approach
- Behavioral Economics
- Normative Economics
- Positive Economics
- Invisible Hand
- Sunk cost