key term - Inferior Goods

Definition

Inferior goods are a type of consumer good for which demand decreases as a person's income rises. In other words, as a person's income increases, they tend to consume less of an inferior good and more of a normal good. This is in contrast to normal goods, for which demand increases as income rises.

5 Must Know Facts For Your Next Test

1. The demand curve for an inferior good slopes downward, unlike the demand curve for a normal good which slopes upward.
2. The income effect for an inferior good is negative, meaning as income rises, the quantity demanded of the inferior good decreases.
3. Inferior goods are often considered necessities, such as basic food items, public transportation, or used clothing, that are consumed more by lower-income individuals.
4. The cross-price elasticity of demand between an inferior good and a normal good is typically positive, meaning they are substitutes for each other.
5. Understanding the concept of inferior goods is important for analyzing how changes in income and prices affect consumption choices, as described in the topics 3.2 and 6.2.

Review Questions

• Explain how the demand for an inferior good changes as a consumer's income increases.
  • As a consumer's income increases, the demand for an inferior good decreases. This is because the income effect for an inferior good is negative, meaning that as a person's income rises, they tend to consume less of the inferior good and more of normal goods. The demand curve for an inferior good slopes downward, unlike the demand curve for a normal good which slopes upward.
• Describe how the relationship between an inferior good and a normal good affects consumer choices.
  • Inferior goods and normal goods are typically substitutes for each other. This means that the cross-price elasticity of demand between an inferior good and a normal good is positive. As the price of the normal good increases, consumers will substitute towards the inferior good, increasing its demand. Conversely, as a consumer's income rises, they will substitute away from the inferior good and towards the normal good, decreasing the demand for the inferior good.
• Analyze how the concept of inferior goods is relevant to understanding shifts in demand and supply, as well as changes in consumption choices.
  • The concept of inferior goods is crucial for understanding how changes in income and prices affect consumption choices, as described in topics 3.2 and 6.2. When a consumer's income increases, the demand for inferior goods decreases, leading to a leftward shift in the demand curve for those goods. Conversely, a decrease in income would increase the demand for inferior goods. Additionally, the substitution effect between inferior goods and normal goods plays a key role in how consumers adjust their consumption choices in response to changes in relative prices.

Related terms

Normal Goods:

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

Giffen Goods: Giffen goods are a special type of inferior good where the income effect is so strong that it outweighs the substitution effect, leading to an increase in demand as the price rises.

Substitution Effect:

The substitution effect describes how a change in the relative price of a good causes a change in the quantity demanded of that good, holding the consumer's real income constant.