Inferior Good
An inferior good is a type of good for which demand decreases when consumer income rises. This is in contrast to a normal good, for which demand increases along with consumer income. Inferior goods are typically lower-cost substitutes for more desirable, higher-cost goods. When consumers’ incomes increase, they shift their consumption to these higher-cost, preferred goods, reducing their consumption of inferior goods.
Examples
- Hamburger vs. Steak: As mentioned, hamburger can be an inferior good. Consumers might buy hamburger when their budget is tight, but switch to purchasing steak as an income increase allows for more expensive purchases.
- Public Transportation: Individuals may use public transportation when their income is lower, but as their income rises, they might purchase their own vehicle and use public transport less frequently.
- Secondhand Clothing: These are often purchased when incomes are lower. As incomes rise, consumers may start buying new clothing instead.
- Instant Noodles: Products like instant noodles are often considered inferior goods. Higher income might lead consumers to opt for fresher, healthier food options.
Frequently Asked Questions (FAQs)
Q1: Can an inferior good become a normal good?
- Yes, market dynamics and changing consumer perceptions can turn an inferior good into a normal good. For example, if a traditionally inferior good gains a premium status due to brand management or change in perception, it can become a normal good.
Q2: Why do inferior goods see a decrease in demand with increased income?
- Inferior goods see a decrease in demand with increased income because consumers have more purchasing power and opt for higher-quality goods that they prefer over the lower-cost alternatives they could afford with less income.
Q3: Are all low-cost goods considered inferior goods?
- No, not all low-cost goods are inferior goods. A good is classified as inferior based on the consumer’s income level and preferences, not solely on its price.
Q4: How does understanding inferior goods help businesses?
- Understanding inferior goods helps businesses in strategizing their product offerings, pricing, and marketing efforts. By recognizing which goods become less desirable as incomes rise, businesses can adjust their focus toward more profitable segments.
Q5: Can the demand for inferior goods increase in a recession?
- Yes, during economic downturns when incomes are generally lower, demand for inferior goods often increases because consumers seek to economize and substitute more expensive goods with lower-cost alternatives.
Related Terms
- Normal Good: A good for which demand increases as consumer income rises.
- Substitute Goods: Goods that can replace each other in consumption; if the price of one rises, the demand for the substitute may increase.
- Complementary Goods: Goods that are often used together, where an increase in the demand for one increases the demand for the other.
- Giffen Good: A type of inferior good for which demand increases as its price increases, due to its strong income effect outweighing the substitution effect.
Online References
- Investopedia: Inferior Goods
- Wikipedia: Inferior Good
- Khan Academy: Planned savings and planned investment
Suggested Books for Further Studies
- Principles of Economics by N. Gregory Mankiw
- Microeconomics by Robert Pindyck and Daniel Rubinfeld
- The Wealth of Nations by Adam Smith
- Economics by Paul Samuelson and William Nordhaus
Fundamentals of Inferior Good: Economics Basics Quiz
### When a consumer's income rises, what generally happens to the demand for an inferior good?
- [x] Decreases
- [ ] Increases
- [ ] Stays the same
- [ ] Doubles
> **Explanation:** Demand for an inferior good decreases as a consumer's income rises. Consumers tend to shift to more expensive or higher-quality alternatives.
### Which of these could be considered an inferior good?
- [ ] Luxury cars
- [x] Instant noodles
- [ ] Designer clothes
- [ ] Gourmet coffee
> **Explanation:** Instant noodles are often considered an inferior good because demand for them generally decreases as consumers' income rises.
### Is public transit typically considered an inferior good?
- [x] Yes
- [ ] No
- [ ] Only in rural areas
- [ ] Only in urban areas
> **Explanation:** Public transit is typically considered an inferior good because demand for it tends to decrease as consumer incomes increase and they can afford personal vehicles.
### What type of good sees an increase in demand as incomes rise?
- [x] Normal good
- [ ] Inferior good
- [ ] Neutral good
- [ ] Durable good
> **Explanation:** A normal good is one where demand increases as incomes rise. Consumers purchase more of these goods as their purchasing power improves.
### What happens to the demand for inferior goods during a recession?
- [x] Increases
- [ ] Decreases
- [ ] Stays the same
- [ ] Doubles
> **Explanation:** During a recession, demand for inferior goods typically increases as consumers seek cheaper alternatives due to decreased income.
### Which of the following is NOT a characteristic of an inferior good?
- [ ] Its demand decreases with rising incomes
- [ ] Often substituted with higher-quality goods as income rises
- [ ] Typically lower-cost
- [x] Its demand increases with rising incomes
> **Explanation:** Unlike normal goods, inferior goods see a decrease in demand as incomes rise.
### Giffen goods are a special case of which type of good?
- [x] Inferior good
- [ ] Normal good
- [ ] Superior good
- [ ] Luxury good
> **Explanation:** Giffen goods are a special case of inferior goods where demand increases as the price increases due to a strong income effect.
### Which economic concept best explains a consumer's shift from buying inferior goods to normal goods as their income increases?
- [x] Income effect
- [ ] Substitution effect
- [ ] Price elasticity
- [ ] Marginal utility
> **Explanation:** The income effect explains how changes in consumer income affect the demand for different types of goods, such as inferior and normal goods.
### Can a good be both inferior and normal depending on consumer income levels?
- [x] Yes
- [ ] No
- [ ] Only in certain markets
- [ ] Only for luxury items
> **Explanation:** Yes, a good can be considered inferior or normal depending on the consumer's income level; what is inferior for one income bracket could be normal for another.
### Why might secondhand clothing be considered an inferior good?
- [x] Demand decreases as incomes rise
- [ ] Demand increases with incomes
- [ ] It’s always in fashion
- [ ] They never increase in price
> **Explanation:** Secondhand clothing is often considered inferior because demand tends to decrease as incomes rise and consumers opt for new clothing.
Thank you for exploring the concept of inferior goods and testing your knowledge with our quiz. Keep studying to deepen your understanding of economic principles!
