In
economics
Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and intera ...
, an inferior good is a good whose demand decreases when consumer income rises (or demand increases when consumer income decreases),
unlike
normal good
In economics, a normal good is a type of a Good (economics), good which experiences an increase in demand due to an increase in income, unlike inferior goods, for which the opposite is observed. When there is an increase in a person's income, for ...
s, for which the opposite is observed. Normal goods are those goods for which the demand rises as consumer income rises.
Inferiority, in this sense, is an observable fact relating to affordability rather than a statement about the quality of the good. As a rule, these goods are affordable and adequately fulfill their purpose, but as more costly substitutes that offer more pleasure (or at least variety) become available, the use of the inferior goods diminishes. Direct relations can thus be drawn from inferior goods to socio-economic class. Those with constricted incomes tend to prefer inferior goods for the reason of the aforementioned observable inferiority.
Depending on consumer or market
indifference curves
In economics, an indifference curve connects points on a graph representing different quantities of two goods, points between which a consumer is ''indifferent''. That is, any combinations of two products indicated by the curve will provide the c ...
, the amount of a good bought can either increase, decrease, or stay the same when income increases.
Examples
There are many examples of inferior goods. A number of economists have suggested that shopping at large discount chains such as Walmart and
rent-to-own
Rent-to-own, also known as rental purchase or rent-to-buy, is a type of legally documented transaction under which tangible property, such as furniture, consumer electronics, motor vehicles, home appliances, real property, and engagement rin ...
establishments vastly represent a large percentage of goods referred to as "inferior". Cheaper cars are examples of the inferior goods. Consumers will generally prefer cheaper cars when their income is constricted. As a consumer's income increases, the demand for the cheap cars will decrease, while demand for costly cars will increase, so cheap cars are inferior goods.
Inter-city
bus
A bus (contracted from omnibus, with variants multibus, motorbus, autobus, etc.) is a road vehicle that carries significantly more passengers than an average car or van. It is most commonly used in public transport, but is also in use for cha ...
service is also an example of an inferior good. This form of transportation is cheaper than
air
The atmosphere of Earth is the layer of gases, known collectively as air, retained by Earth's gravity that surrounds the planet and forms its planetary atmosphere. The atmosphere of Earth protects life on Earth by creating pressure allowing f ...
or
rail
Rail or rails may refer to:
Rail transport
*Rail transport and related matters
*Rail (rail transport) or railway lines, the running surface of a railway
Arts and media Film
* ''Rails'' (film), a 1929 Italian film by Mario Camerini
* ''Rail'' ( ...
travel, but is more time-consuming. When money is constricted, traveling by bus becomes more acceptable, but when money is more abundant than time, more rapid transport is preferred. In some countries with less developed or poorly maintained railways this is reversed: trains are slower and cheaper than buses, so rail travel is an inferior good.
Certain financial services, including
payday lending
A payday loan (also called a payday advance, salary loan, payroll loan, small dollar loan, short term, or cash advance loan) is a short-term unsecured loan, often characterized by high interest rates.
The term "payday" in payday loan refers to ...
, are inferior goods. Such financial services are generally marketed to persons with low incomes. People with middle or higher incomes can typically use credit cards that have better terms of payment or bank loans for higher volumes and much lower rates of interest.
Inexpensive foods like
instant noodles,
bologna
Bologna (, , ; egl, label= Emilian, Bulåggna ; lat, Bononia) is the capital and largest city of the Emilia-Romagna region in Northern Italy. It is the seventh most populous city in Italy with about 400,000 inhabitants and 150 different nat ...
,
pizza
Pizza (, ) is a dish of Italian origin consisting of a usually round, flat base of leavened wheat-based dough topped with tomatoes, cheese, and often various other ingredients (such as various types of sausage, anchovies, mushrooms, onions ...
,
hamburger
A hamburger, or simply burger, is a food consisting of fillings—usually a patty of ground meat, typically Ground beef, beef—placed inside a sliced bun or bread roll. Hamburgers are often served with cheese, lettuce, tomato, onion, pickles ...
, mass-market
beer
Beer is one of the oldest and the most widely consumed type of alcoholic drink in the world, and the third most popular drink overall after water and tea. It is produced by the brewing and fermentation of starches, mainly derived from ce ...
,
frozen dinners
A frozen meal (also called TV dinner (Canada and US), prepackaged meal, ready-made meal, ready meal (UK), frozen dinner, and microwave meal) is a packaged frozen meal that comes portioned for an individual. A frozen meal in the United States a ...
, and
canned goods
Canning is a method of food preservation in which food is processed and sealed in an airtight container ( jars like Mason jars, and steel and tin cans). Canning provides a shelf life that typically ranges from one to five years, although ...
are additional examples of inferior goods. As incomes rise, one tends to purchase more expensive, appealing or nutritious foods. Likewise, goods and services used by poor people for which richer people have alternatives exemplify inferior goods. As a rule, used and obsolete goods (but not
antiques
An antique ( la, antiquus; 'old', 'ancient') is an item perceived as having value because of its aesthetic or historical significance, and often defined as at least 100 years old (or some other limit), although the term is often used loosely ...
) marketed to persons of low income as
closeouts are inferior goods at the time even if they had earlier been normal goods or even luxury goods.
Others are very inconsistent across geographic regions or cultures. The
potato
The potato is a starchy food, a tuber of the plant ''Solanum tuberosum'' and is a root vegetable native to the Americas. The plant is a perennial in the nightshade family Solanaceae.
Wild potato species can be found from the southern Unit ...
, for example, generally conforms to the demand function of an inferior good in the Andean region where the crop originated. People of higher incomes and/or those who have migrated to coastal areas are more likely to prefer other staples such as rice or wheat products as they can afford them. However, in several countries of Asia, such as
Bangladesh
Bangladesh (}, ), officially the People's Republic of Bangladesh, is a country in South Asia. It is the eighth-most populous country in the world, with a population exceeding 165 million people in an area of . Bangladesh is among the mos ...
, potatoes are not an inferior good, but rather a relatively expensive source of calories and a high-prestige food, especially when eaten in the form of
French fries
French fries (North American English), chips (British English), finger chips ( Indian English), french-fried potatoes, or simply fries, are '' batonnet'' or ''allumette''-cut deep-fried potatoes of disputed origin from Belgium and France. Th ...
by urban elites.
Income and substitution effects
![Home brand beer nuts](https://upload.wikimedia.org/wikipedia/commons/d/d9/Home_brand_beer_nuts.jpg)
The shift in consumer demand for an inferior good can be explained by two natural economic phenomena: The substitution effect and the income effect. These effects describe and validate the movement of the demand curve in (independent) response to increasing income and relative cost of other goods.
Income effect
The income effect describes the relationship between an increase in real income and demand for a good. The result of the income effect for a normal good is discernible to that of an inferior good in that a positive income change causes a consumer to buy more of a normal good, but less of an inferior good.
The increase in real income means consumers can afford a bundle of goods that give them higher utility and contain a lower number of inferior goods. Consumers thus choose to decrease their consumption of inferior goods when real income increases, showing the inverse relation between inferior goods and the income effect.
Substitution effect
The substitution effect occurs due to a change in relative prices between two or more goods. For both normal and inferior goods, a price increase will lead to a reduction in quantity consumed of the good due to substitute goods being relatively cheaper.
Consumers substitute the good in which the price has increased for either cheaper goods of the same observed quality or increase their consumption of other inferior goods.
Overall change in demand for an inferior good
The income and substitution effects work in opposite directions for an inferior good. When an inferior good’s price decreases, the income effect reduces the quantity consumed, whilst the substitution effect increases the amount consumed. In practice, it has been observed that the substitution effect is usually larger than the income effect due to the small amount of gross income allocated by consumers on any given good, and thus the change in demand is usually insignificant in comparison to the substitution effect.
Giffen goods
A special type of inferior good may exist known as the
Giffen good
In economics and consumer theory, a Giffen good is a product that people consume more of as the price rises and vice versa—violating the basic law of demand in microeconomics. For any other sort of good, as the price of the good rises, the sub ...
, which would disobey the "
law of demand
In microeconomics, the law of demand is a fundamental principle which states that there is an inverse relationship between price and quantity demanded. In other words, "conditional on all else being equal, as the price of a good increases (↑), ...
". Quite simply, when the price of a Giffen good increases, the demand for that good increases. This would have to be a particular good that is such a large proportion of a person or market's consumption that the
income effect
The theory of consumer choice is the branch of microeconomics that relates preferences to consumption expenditures and to consumer demand curves. It analyzes how consumers maximize the desirability of their consumption as measured by their pref ...
of a price increase would produce, effectively, more demand. The observed
demand curve
In economics, a demand curve is a graph depicting the relationship between the price of a certain commodity (the ''y''-axis) and the quantity of that commodity that is demanded at that price (the ''x''-axis). Demand curves can be used either for ...
would slope ''upward'', indicating positive
elasticity.
Giffen goods were first noted by
Sir Robert Giffen
Sir Robert Giffen (22 July 1837 – 12 April 1910) was a Scottish statistician and economist.
Life
Giffen was born at Strathaven, Lanarkshire. He entered a solicitor's office in Glasgow, and while in that city attended courses at the uni ...
. It is usual to attribute Giffen's observation to the fact that in Ireland during the 19th century there was a rise in the price of potatoes. The explanation follows that poor people were forced to reduce their consumption of meat and expensive items such as eggs. Potatoes, still being the cheapest food, meant that poor people started consuming more even though its price was rising. This phenomenon is often described as "Giffen's Paradox". However, it has been noticed that Giffen did not use potatoes as an example of Giffen goods. Moreover, potatoes were not Giffen Goods during the
Great Famine in Ireland.
Alfred Marshall's explanation of Giffen's Paradox was presented in terms of bread.
See also
*
Ersatz
An ersatz good () is a substitute good, especially one that is considered inferior to the good it replaces. It has particular connotations of wartime usage.
Etymology
''Ersatz'' is a German word literally meaning ''substitute'' or ''replaceme ...
*
Substitute good
In microeconomics, two goods are substitutes if the products could be used for the same purpose by the consumers. That is, a consumer perceives both goods as similar or comparable, so that having more of one good causes the consumer to desire less ...
*
Kuznets curve
The Kuznets curve () expresses a hypothesis advanced by economist Simon Kuznets in the 1950s and 1960s. According to this hypothesis, as an economy develops, market forces first increase and then decrease economic inequality.
The Kuznets curve ...
References
{{DEFAULTSORT:Inferior Good
Goods (economics)