Inferior goods

Examples of Inferior goods in the following topics:

• Impact of Income on Consumer Choices

  • As a result, it is useful to outline the differences in income effects on normal, inferior, complementary and substitute goods:
  • Inferior:Inferior goods, or goods that are less preferable, will demonstrate inverse relationships with income compared to normal goods.
  • That is to say that an increase in income will not necessarily result in an increase in quantity for the inferior good, as the consumer derives minimal utility in purchasing the inferior good compared to other goods.
  • Inferior goods are often sacrificed as income rises and consumers gain more choice/options.
  • This graph demonstrates the inverse relationship between income and the consumption of inferior goods.

• Income Elasticity of Demand

  • A negative income elasticity is associated with inferior goods.
  • This is typical of a luxury or superior good.
  • This is characteristic of a necessary good.
  • These are called sticky goods.
  • This is an inferior good (all other goods are normal goods).

• The Law of Demand

  • If the income of the consumer, prices of the related goods, and preferences of the consumer remain unchanged, then the change in quantity of good demanded by the consumer will be negatively correlated to the change in the price of the good or service.
  • Though in general terms and specific to normal goods, demand will exhibit a downward slope, there are exceptions: Giffen goods and Veblen goods
  • A Giffen good describes an extreme case for an inferior good.
  • example of a Giffen good, though a popular albeit historically inaccurate example is the purchase of potatoes (an inferior good) as prices continued to increase during the Irish potato famine.
  • These goods are known as a Veblen goods.

• Demand Function

  • An individual's demand function for a good (Good X) might be written:
  • Only in unusual circumstances (a highly inferior good, a Giffen good) may a demand function have a positive relationship.
  • An inferior good is characterized by an inverse or negative relationship between the change in income and change in demand.
  • A superior good is a special case of the normal good.
  • For an inferior good, a decrease in income will shift the demand to the right.

• Changes in Demand and Shifts in the Demand Curve

  • Demand is the relationship between the willingness to purchase a quantity of a good or service at a specific price.
  • An increase in income will cause an outward shift in demand (to the right) if the good or service assessed is a normal good or a good that is desirable and is therefore positively correlated with income.
  • Alternatively, an increase in income could result in an inward shift of demand (to the left) if the good or service assessed is an inferior good or a good that is not desirable but is acceptable when the consumer is constrained by income .
  • The demand curve for a good will shift in parallel with a shift in the demand for a complement.
  • A demand curve provides an economic agent's price to quantity relationship related to a specific good or service.

• Market Demand

  • The demand schedule represents the amount of some good that a buyer is willing and able to purchase at various prices.
  • In general, this means that the demand curve is downward-sloping, which means that as the price of a good decreases, consumers will buy more of that good.
  • A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at every different price.
  • However, special cases exist where the preference for the good or service may be perverse.
  • Two different hypothetical types of goods with upward-sloping demand curves are Giffen goods (an inferior but staple good) and Veblen goods (goods characterized as being more desirable the higher the price; luxury or status items).

• Shifts in the Money Demand Curve

  • Decrease in consumer income if the good is a normal good
  • Increase in consumer income if the good is an inferior good

• Willingness to Pay and the Demand Curve

  • In general as the price of a good increases, the quantity demanded of that good decreases.
  • The reason for this is because part of the value of the good is exclusivity.
  • Giffen goods are very rare and are defined by three characteristics:
  • It is an inferior good, or a good for which demand decreases as consumer income rises,
  • In this instance, bread is a giffen good.

• Applications of Principles on Consumer Choices

  • In we are comparing 'Good X' and 'Good Y' to identify how a change in income will alter the overall amount of each good would likely be purchased along a series of indifference curves (see Boundless atom on 'Indifference Curves').
  • This translates to the graph above as the consumer makes choices to maximize utility when comparing the price of different goods to a given income level, substituting cheaper goods and more expensive goods dependent upon purchasing power.
  • Inferior goods, on the other hand, will demonstrate an inverse relationship.
  • Inversely, Giffen goods demonstrate a positive relationship, where the price rises will result in higher demand for the good and high consumption.
  • To apply this to the concept of different types of goods above, one can view wage rates and leisure time as consumer goods.

• Consumer Choice and Utility

  • In Table IV.2 the preferences for two goods (good X, xebecs and good Y, yawls) is shown.
  • When EM is positive, the good is called a normal good.
  • If an increase in income reduces demand (or a decrease in income increases demand), EM will be negative and the good is categorized as an inferior good.
  • EM < 0 means the good is inferior, i.e. for an increase in income the quantity purchased will decline or for a decrease in income the quantity purchased will increase
  • For EM > 1 the good is considered a superior good.