Inferior Goods

An inferior good is a category of products whose demand declines as consumer income rises. When a country's economy grows, so does its citizens' income, causing them to move to more expensive alternatives or brands while disregarding those they previously used to purchase.

The increase in consumer income affects their buying behavior greatly that impacts the sale of some products. As a result, due to their diminishing demand, these products become less desirable and inferior goods. Such goods indicate negative price elasticity but prove to be a more affordable and in-demand alternative for expensive ones in recession, economic contraction, or lower income.

• Inferior good meaning a category of goods whose demand declines as the income grows, as consumers turn to more expensive alternatives while ignoring those they previously used to buy.
• The shift is due to customers' desire for a better lifestyle by purchasing more expensive and luxurious goods.
• Inferior goods are among the four types of goods: normal or necessary goods, Giffen goods, and luxury goods.
• In times of recession, economic contraction, or decreased income, inferior items could be an affordable and in-demand substitute for any typical good, such as groceries, dining, transportation, lodging, etc.

Inferior goods are characterized by consumers' shift to more expensive products when they start earning well or change their socioeconomic status. The term "inferior" does not signify the quality of products or services in any manner. Instead, it marks the change in consumer preferences due to income growth and their instant switch to more affordable goods.

A class of product that is inferior for one group of people could be normal for the other group at the same time. Usually, people with a low-income level consider these products. However, only consumers' spending capacities and preferences can determine which product or service is normal and inferior. Inferior goods are among the four classes of products besides normal goods, Giffen goods, and luxury goods.

#1 - Normal Goods

These are products whose demand increases with the increase in the consumer income level and vice-versa. However, the product price remains constant. These goods are also characterized as necessary or essential goods.

#2 - Inferior Goods

These are goods whose demand decreases with increased consumer income levels. The consumer shift occurs because they desire to lead a better lifestyle with more expensive and luxurious products. It is not connected with the quality of the product or service. However, it does not always happen as consumers keep buying inferior products regardless of income increase.

These goods, therefore, could be defined as an affordable substitute for normal goods. In addition, such products belong to multiple categories, including groceries, transportation, dining, accommodations, etc.

#3 - Luxury Goods

These are less essential products whose demand is directly related to the higher income level of consumers, such as automobiles, fashion accessories, electronics, etc., are the third category.

#4 - Giffen Goods

These are products whose demand continues to rise even as prices rise, primarily due to the lack of alternatives. But the customer's income does not play any role here.

Let us consider the following inferior goods examples to get a deeper insight into the concept:

Example #1

Kevin decided to take a vacation to Arizona and look for suitable lodging. He chose two hotels, A and B, with $100 and $250 for three days and two nights. Kevin had chosen Hotel A on his previous visit to the state since it was the most affordable option at the time.

He compared the ratings and reviews of both hotels and realized that they were nearly identical. The price difference was due to the additional amenities given by the other hotel. Based on his spending capacities, Kevin finalized the hotel B and opted to spend time there based on his spending capacities, despite the higher expense.

Example #2

Linda, a bank manager, had been buying goods from local stores in her neighborhood for quite some time. She was quite pleased with the product quality and pricing. Despite her higher salary, Linda had never considered buying from a branded grocery store. The inferior goods for individuals of her level were nonetheless normal for her.

It illustrates how a product can only be made inferior if the customer wants it. A person's behavior determines whether they consider a good as normal or inferior.

Inferior and normal goods are two opposite terms and remain interrelated based on consumer desire, affordability, and behavior. The former is a class of products and services whose demand decreases with the consumer income level. The latter refers to goods whose demand increases as the economy and income of its population grow.

Unlike inferior products, the necessary goods have a positive price or income elasticity of demand. However, a product that is inferior for one person could be normal for another at the same time, depending on the country and geography.

Consider the two cars, A and B, are on the market and are valued at $5,000 and $10,000, respectively. Both vehicles have the same features; however, their appearances differ slightly. While some people choose car B based on their spending capacity, others choose car A since they earn less than the first group.

In the example above, automobile A is an inferior good for those with higher incomes. However, it is still a normal good for those who cannot afford to buy luxurious automobiles with the same functional qualities.

Giffen goods are those items whose demand grows even if their prices rise. It occurs primarily due to the lack of alternatives in certain product categories. Therefore, people must continue to purchase these products, regardless of how much the costs rise. On the other hand, lower-income or economic downturns drive demand for inferior goods, not pricing.

In other words, the income level has no bearing on the sale of Giffen goods, so there is no impact on the demand and supply chain. Some of the products that fall under this category include:

• Rice
• Milk
• Bread, etc.

A demand curve shows the growth or decline in a product's demand due to changes in the relative parameters. For example, the inferior goods demand curve reflects the difference in income levels and customer preferences and its impact on the demand.

An increase in income will result in an outward shift in demand for normal goods, given the latter is directly proportional to the former. On the other hand, there could be an inward shift in demand for inferior products as consumer preferences change depending on their spending capabilities, negatively affecting their demand.

This has been a guide to what are Inferior Goods and their meaning. Here we discuss types of inferior goods along with examples and their differences with Normal & Giffen goods. You may refer to the following articles to learn more about finance –

• Law of Supply and Demand
• Microeconomics
• Complementary Goods