Inferior Goods: Definition, Role of Consumer Behavior Demand, and Examples

When people have less money, they tend to buy these kinds of products. But when their incomes rise, they often give these up for more expensive items. Conversely, the demand for inferior goods increases when incomes fall or the economy contracts. When this happens, inferior goods become a more affordable substitute for more expensive goods. Governments and researchers may use the demand and supply of inferior and normal goods to gauge the standards of living in a given country. An increase in the demand for inferior goods and at the same time a general decrease in the demand for normal goods signals bad economic times in given economy.

A Veblen good is an item whose increase in price may actually result in higher sales. These types of goods are often a subset of a luxury good, and this type of good often defies many traditional concepts of economics. Should the artwork actually be valued at $1 million, theory holds that more investors would be interest as there is greater potential value.

Some of the reasons behind this shift may include quality or a change in a consumer’s socioeconomic status. When there is a change in the income of consumers, it causes a positive change in the demand for normal goods and a negative change in the demand for inferior goods. Therefore, in the case of normal goods and inferior goods, the demand curve of a given commodity changes with a change in income.

Do Inferior Goods Have an Inferior Quality?

1. If a brand raises its price, some consumers will select a cheaper alternative.
2. When there is an increase in the income from OY to OY1, then the demand for Refrigerator will also rise from OQ to OQ1.
3. Normal goods are those whose demand increases as people’s incomes and purchasing power rise.
4. Consumers with more money may opt to buy more expensive substitutes instead of what they could afford only when incomes were lower.
5. This would even include spoiled products such as broken eggs and shoes with manufacturing defects.

An inferior good is a good that decreases in demand when the income of the consumer increases. The term inferiority in this context refers to the price of the commodity and not necessarily the quality. For example, the price of second-hand clothes is lower than that of new clothes.

Rightward and Leftward Shift in Demand Curve

1. The goods whose demand increases when there is an increase in the income of the consumer are known as Normal Goods.
2. A product may lose market share for many reasons, but the substitution effect is purely a reflection of frugality.
3. When the economy is in good shape and income increases, people buy fewer inferior goods but when the economy is not strong and people’s income comes down, they buy more inferior goods.
4. If there is an increase or decrease in the consumer’s income, it inversely affects the given commodity’s demand.

When a consumer’s income drops, they may substitute their daily Starbucks java for the more affordable McDonald’s brew. On the other hand, when a consumer’s income rises, they may substitute their McDonald’s coffee for the more expensive Starbucks coffee. We can also turn to transportation as an example of an inferior good. When people’s incomes are low, they may opt to ride public transport. When their incomes rise, they may stop riding the bus and, instead, take taxis or even buy cars. In addition, buying a vehicle may be classified by different tiers, as a used Honda may be considered inferior to a new Tesla.

Chapter 2: Consumer’s Equilibrium

Inferior goods are goods for which demand declines as consumers’ real incomes rise, or rises as incomes fall. Consumers with more money may opt to buy more expensive substitutes instead of example of inferior goods what they could afford only when incomes were lower. Inferior goods are goods or services that are of lower quality or lower value compared to other goods or services in the same category.

The poor people were unable to buy the more luxurious products like meat and eggs and instead increased their consumption of vegetables. For normal economic goods, when real consumer income rises, consumers will demand a greater quantity of goods for purchase. In other words, it is the change in demand for a good or service caused by a change in a consumer’s purchasing power resulting from a change in real income.

Evolution Over Time

Besides, in the case of necessity goods, there is no change in its demand when the income of consumers increase or decrease. The goods whose demand reduces when there is an increase in the income of the consumer are known as Inferior Goods. In simple terms, there exists an inverse relationship between the consumer’s income and demand for inferior goods. Consumers usually purchase inferior goods because they are essential for their life; like, coarse grains, etc.

Some of the examples of Necessity Goods are wheat flour, salt, medicines, etc. Necessity goods are essential for human existence, because of which these goods are found at a higher place in the consumer’s order of preference. The difference between the income effect and the price effect is that the income effect evaluates consumer spending habits based on a change in their income. The price effect instead considers consumer spending habits based on a change in the price of a good or service.

A normal good is defined as having an income elasticity of demand coefficient that is positive, but less than one. Changes in real income can result from nominal income changes, price changes, or currency fluctuations. When nominal income increases without any change to prices, this means consumers can purchase more goods at the same price, and for most goods, consumers will demand more. The income effect, in microeconomics, is the resultant change in demand for a good or service caused by an increase or decrease in a consumer’s purchasing power or real income.

However, critics have argued that there are so many factors that determine the demand for the commodity and not only the income of consumers and the value of the commodity. Factors like tastes and preferences, age, availability of substitutes and supplements, and also age have a significant influence on the demand of any given commodity. The income effect identifies the change in consumers’ demand for goods and services based on their incomes. In general, as one’s income rises, they will begin to demand more goods. The marginal propensity to spend and the marginal propensity to save are looked at when determining the influences of the income effect.

For example, in Africa, the second-hand business is a booming business which targets the low-income earners. On the other hand, chain stores like the Urban Outfitters have also sprung. Most governments will tax traders dealing with inferior goods more leniently as compared to those selling normal goods.