Inferior good

Good Y is a normal good since the amount purchased increases from Y1 to Y2 as the budget constraint shifts from BC1 to the higher income BC2. Good X is an inferior good since the amount bought decreases from X1 to X2 as income increases.

In economics, an inferior good is a good whose quantity demanded decreases when consumer income rises (or quantity demanded rises when consumer income decreases),[1] unlike normal goods, for which the opposite is observed.[2] Normal goods are those for which consumers' demand increases when their income increases. [3] This would be the opposite of a superior good, one that is often associated with wealth and the wealthy, whereas an inferior good is often associated with lower socio-economic groups.

Inferiority, in this sense, is an observable fact relating to affordability rather than a statement about the quality of the good. As a rule, these goods are affordable and adequately fulfill their purpose, but as more costly substitutes that offer more pleasure (or at least variety) become available, the use of the inferior goods diminishes.

Depending on consumer or market indifference curves, the amount of a good bought can either increase, decrease, or stay the same when income increases.

Examples

There are many examples of inferior goods. Several economists have suggested that shopping at large discount chains such as Walmart and rent-to-own establishments vastly represent a large percentage of goods referred to as "inferior". Cheaper cars are examples of the inferior goods. Consumers will generally prefer cheaper cars when their income is constricted. As a consumer's income increases the demand of the cheap cars will decrease, while demand of costly cars will increase, so cheap cars are inferior goods.

Inter-city bus service is also an example of an inferior good. This form of transportation is cheaper than air or rail travel, but is more time-consuming. When money is constricted, traveling by bus becomes more acceptable, but when money is more abundant than time, more rapid transport is preferred. In some countries with less developed or poorly maintained railways, for example Serbia, this is reversed: trains are slower and cheaper than buses, so rail travel is an inferior good.

Certain financial services, including payday lending, are inferior goods. Such financial services are generally marketed to persons with low incomes. People with middle or higher incomes can typically use credit cards that have better terms of payment or bank loans for higher volumes and much lower rates of interest. [4]

Inexpensive foods like instant noodles, bologna, hamburger, mass-market beer, frozen dinners, and canned goods are additional examples of inferior goods. As incomes rise, one tends to purchase more expensive, appealing and nutritious foods. Likewise, goods and services used by poor people for which richer people have alternatives exemplify inferior goods. As a rule, used and obsolete goods (but not antiques) marketed to persons of low income as closeouts are inferior goods at the time even if they had earlier been normal goods or even luxury goods.

Others are very inconsistent across geographic regions or cultures. The potato, for example, generally conforms to the demand function of an inferior good in the Andean region where the crop originated. People of higher incomes and/or those who have migrated to coastal areas are more likely to prefer other staples such as rice or wheat products as they can afford them. However, in several countries of Asia, such as Bangladesh, potato is not an inferior good, but rather a relatively expensive source of calories and a high-prestige food, especially when eaten in the form of "French fries" by urban elites.[5]

Giffen goods

Main article: Giffen good

A special type of inferior good may exist known as the Giffen good, which would disobey the "law of demand". Quite simply, when the price of a Giffen good increases, the demand for that good increases. This would have to be a good that is such a large proportion of a person or market's consumption that the income effect of a price increase would produce, effectively, more demand. The observed demand curve would slope upward, indicating positive elasticity.

It was noted by Sir Robert Giffen III that in Ireland during the 19th century there was a rise in the price of potatoes. The poor people were forced to reduce their consumption of meat and expensive items as eggs etc. Now potatoes being still the cheapest food, they started consuming more of it even though its price was rising. This phenomenon is often described as "Giffen's Paradox".

See also

References

  1. ↑ Mankiw, N. Gregory, Principles of Economics, South-Western Cengage Learning, 2012, p.70
  2. ↑ "Economics A–Z: Inferior goods". The Economist. Retrieved 17 August 2016.
  3. ↑ O'Sullivan, Arthur; Sheffrin, Steven M. (2003), Economics: Principles in Action, Upper Saddle River, New Jersey 07458: Pearson Prentice Hall, p. 87, ISBN 0-13-063085-3
  4. ↑ "Payday Lending in America". The Pew Charitable Trusts. 18 July 2012.
  5. ↑ Scott, G.J.; Bouis, H.E., "Sustainability of Potato Consumption in Developing Countries: The Case of Bangladesh", Program Report 1995–1996, International Potato Center, Archived from the original on 8 April 2010
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