key term - Inferior Goods

Definition

Inferior goods are a type of consumer good for which demand decreases as income increases. As a person's income rises, they tend to purchase fewer inferior goods and shift their consumption towards more desirable, or superior, goods. This relationship between income and demand is the opposite of what is observed for normal goods.

5 Must Know Facts For Your Next Test

1. Inferior goods are often basic or necessity items that consumers purchase less of as their income increases, such as generic or store-brand products.
2. The demand for inferior goods is driven by the income effect, where higher incomes allow consumers to purchase more expensive, superior alternatives.
3. Examples of inferior goods include basic food staples, public transportation, and used clothing, as opposed to more expensive, higher-quality options.
4. The cross-price elasticity of demand between inferior goods and their superior substitutes is typically positive, as consumers switch between the two as their income changes.
5. Understanding consumer preferences for inferior goods is important for businesses to develop effective pricing and marketing strategies.

Review Questions

• Explain how the demand for inferior goods changes as a consumer's income increases.
  • As a consumer's income increases, the demand for inferior goods decreases. This is because the income effect causes the consumer to shift their consumption towards more desirable, or superior, goods. The consumer can now afford to purchase higher-quality alternatives, and they tend to purchase fewer of the basic, inferior goods they previously relied on when their income was lower.
• Describe the relationship between inferior goods and the income elasticity of demand.
  • Inferior goods have a negative income elasticity of demand. This means that as a consumer's income increases, their demand for the inferior good decreases. The income elasticity of demand for inferior goods is less than zero, indicating an inverse relationship between income and demand. This is in contrast to normal goods, which have a positive income elasticity of demand, where demand increases as income increases.
• Analyze how the cross-price elasticity of demand between inferior goods and their superior substitutes influences consumer behavior.
  • The cross-price elasticity of demand between inferior goods and their superior substitutes is typically positive. This means that as the price of the superior substitute increases, the demand for the inferior good increases, as consumers switch to the more affordable option. Conversely, if the price of the superior substitute decreases, the demand for the inferior good will decrease, as consumers shift their consumption to the higher-quality alternative. This relationship is important for businesses to understand when developing pricing and marketing strategies for products that have inferior and superior options.

Related terms

Normal Goods:

Normal goods are consumer goods for which demand increases as income increases. As a person's income rises, they tend to purchase more of these goods.

Giffen Goods: Giffen goods are a special type of inferior good where demand increases as the price of the good increases, due to a strong income effect.

Income Elasticity of Demand: Income elasticity of demand measures the responsiveness of demand for a good to changes in a consumer's income. Inferior goods have a negative income elasticity of demand.