What is an Inferior Good?

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Definition:

An inferior good is something that people buy less of when their income goes up, which is the opposite of what happens with a normal good.

🤔 Understanding inferior goods

Inferior goods are products that people tend to buy more of at lower income levels and consume less of as their incomes rise. These goods are unique because they react to income changes in the opposite direction compared to normal goods. With normal goods, demand generally increases with income. With inferior goods, there is a decrease in demand as people see their purchasing power grow. Inferior goods are not necessarily inferior to other products, although they do tend to be cheaper. Rather, the term refers to the demand for the product relative to income.

Example

Imagine you were in college. You spend all your time studying, which leaves little time to earn a living. Plus, all your money goes toward tuition and books. You probably have a negative income ⁠— As you are taking out student loans just to get by.

On this tight budget, you have to stretch your dollars. So, you probably eat a lot of bologna, rice, and ramen. Once you graduate, your income situation changes. Now that you have a little more money, maybe you put smoked turkey or honey ham on those sandwiches. The fact that your demand for bologna decreases as you make more money means that it is an inferior good.

Takeaway

An inferior good is like the packaged ramen from your college days...

As you get older and graduate, your income changes and so do your preferences. Now you might want some fresh, hand-pulled noodles with some pork belly and a soft boiled egg instead of the packaged stuff. If you make more money and your demand for packaged ramen decreases, it becomes an inferior good.

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What are some examples of inferior goods?

Inferior goods tend to be relatively inexpensive things that you purchase less of as your income goes up. Because of their affordability, they are products most often purchased by people with low income.

For that reason, inferior goods are usually the lower-priced versions of some bare necessities, especially food. Bologna, rice, pasta, instant noodles, jarred spaghetti sauce, ground hamburger, bread, cereal, fast food, and generic brand products are examples.

Likewise, off-brand clothing, shoes, shampoo, and other products would be considered inferior goods. Public transportation is also an inferior good in most cases, seeing as people tend not to ride the bus as much if they can afford an Uber or their own vehicle.

Is an inferior good something people don’t want?

An inferior good is still a good. It is something people desire. It’s just that people only tend to buy those goods if that is all they can afford. That doesn’t mean people don’t want these goods at all. If that were the case, these products would be called bads.

You don’t run across the term “bads” very often, but it is sometimes used to reference things that people don’t want. In fact, people are willing to pay money not to have these items. The best example of bads is your garbage.

You would not pay money for someone to bring you more trash. Instead, you pay people money to take yours away. So, your waste is a bad.

Inferior goods are not bads; they are just things people typically cut back on when times are good.

What is the difference between inferior and normal goods?

In microeconomic theory, there is an assumption that people only buy as much as they can afford. If a person increases their income, that also increases their budget constraint. With more money comes more spending.

For most products, buying another unit generates more happiness – But by smaller and smaller increments. For example, a second television might add value to you, but going from one to two TVs provides a more modest improvement than going from zero to one.

An additional unit of consumption could even be detrimental. Imagine eating a fourth hamburger and getting sick. In those cases, a rational consumer would not make that purchase. But, until buying more of something provides a negative consequence, the idea is that people want more and more. They just can’t afford everything they want.

This fact is why normal goods have a standard relationship with income — As you make more money, you can afford to buy more of the things you want.

Inferior goods are also things people want. It’s just that the marketplace offers better alternatives to satisfy the underlying desire. For instance, if a person has a craving for meat, their budget might determine the type of meat they buy rather than the quantity.

At a lower income level, hamburger meat might be all that someone can afford. When they have a little bit more money, they might not react by buying an extra pound of ground beef. We might see them switching to steak instead of buying ground beef at all. If so, we would say that ground beef is an inferior good because people substitute away from it as their income rises.

What is the difference between inferior goods and luxury goods?

A luxury good is almost the opposite of an inferior good. Luxury goods are things you only buy once your basic needs are met ⁠— Like vacations, art, fine wine, and jewelry. Conversely, inferior goods are those things that you only buy to meet your basic needs.

Simply put, when times are good, you buy fewer inferior goods and more luxury goods. When money is tight, luxury goods are the things you cut out of your budget, while you increase the amount of inferior goods you buy.

What is the difference between inferior, Giffen, and Veblen goods?

Giffen goods are a subset of inferior goods. However, the distinction comes from what you are measuring. With all inferior goods, the consumption of the product decreases as income increases. That relationship is the reverse of what we would expect to see with a normal good.

But, with a Giffen good, there is also a backward relationship to the price of the good itself. Under normal circumstances, a person is willing to buy more of something if the price is reduced. And, if you increase the price of a product, you should expect to sell less of it.

With a Giffen good, as the price increases, the quantity that gets purchased also increases. This relationship is a violation of the law of demand itself⁠ — Most inferior goods do not violate the law of demand, while Giffen goods do.

A Giffen good is a particular type of inferior good. In addition to having a reverse relationship with income, it also reacts differently to its own price at specific points along the demand curve.

A Giffen good has no close substitute, which requires substitution decisions to be more dramatic than with other inferior goods. Consequently, an increase in the price of the Giffen good can force the reversal of the substitution, creating the peculiar circumstance that violates the law of demand.

An example of a Giffen good is potatoes. Potatoes are an inferior good, so their demand tends to decrease as income rises. But there aren’t any cheap, close alternatives to potatoes. So, if the price of potatoes increases, cash-strapped consumers may end up giving up something more expensive (like hamburger or steak) to afford more potatoes, rather than going without.

There is another type of good that exhibits the same price-quantity violation of the law of demand. They are called Veblen goods. With these particular products, an increase in price also results in higher sales. However, Veblen goods tend to be luxury rather than inferior goods. An example might be a work of art.

With a price tag of $500, people might walk by the painting. But, with a price tag of $50,000, collectors might suddenly get more interested. This reaction is the opposite of what the law of demand says to expect, and it occurs because people mistake the high price for an indication of actual value.

What is inferior good elasticity?

Elasticity is a measure of the extent to which a change in one variable causes a reaction in another. It is most commonly discussed as price elasticity of demand, seeing as the laws of supply and demand refer to the relationship between a product’s price and its sales. However, there are other ways to use the concept of elasticity. In this case, we can look at income elasticity relative to a product’s sales.

If you were to plot how consumer behavior changes in terms of income and consumption, you would see a visual representation of that relationship.

For a normal good, the amount of a product that is purchased would increase as income increases. An inferior good would look different — It would have a negative slope. As incomes increase, the product demand decreases.

To calculate the income elasticity of demand, you need to divide the change in income by the change in the amount of purchases (the rise/run of the slope). The income elasticity formula would be:

For example, imagine a 5% raise brings your income from $50,000 to $52,500. The question of interest is what you will do with that additional $2,500. Perhaps you go out to dinner a few more times a year. That would imply that dining out is a normal good (or maybe even a luxury good).

But, going out to eat means that you buy fewer groceries. Let’s say your annual purchases of corned beef go down from 30 to 27 cans. That is a percentage change of -10%.

Therefore, your income elasticity for corned beef is -2 ( -10% / 5% ). Because corned beef is an inferior good, its income elasticity is negative. If it were a normal good, it would have a positive income elasticity.

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