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What Are Inferior Goods?

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  • Written By: Stacy Blumberg
  • Edited By: Heather Bailey
  • Last Modified Date: 25 September 2014
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Inferior goods are goods that experience a decrease in demand when consumer income increases. The opposite of inferior goods are normal goods which experience an increase in demand when consumer income increases. These concepts come from consumer theory in microeconomics which relates preferences to demand curves. Consumer theory uses models to represent hypothetical demand patterns for individual buyers.

An example of an inferior good is public transportation. Typically, public transport is utilized by those who cannot afford a personal vehicle and the expenses that go along with ownership. Personal vehicles offer a decrease in transport time and the added convenience of not having to adhere to a bus schedule. An increase in income allows the purchase or lease of a vehicle, auto insurance, gas, and regular maintenance. When this occurs, the use of public transportation is given up in favor of using the automobile, the normal good.

Economists use the term elasticity of demand to refer to the change in demand for an item as income increases. Inferior goods are said to have negative income elasticity of demand. Conversely, normal goods have positive elasticity of demand.

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Another economic term used with normal and inferior goods is income effect. Income effect is the idea that consumers will purchase more of a certain good as the price of the good falls. In the case of a normal good, there is a positive income effect because a consumer with the same income level can afford more of the good. Income effect is negative with an inferior good, but another effect, called the substitution effect, causes a slight overall increase in the consumption of the inferior good as the price decreases.

There is an extremely rare type of inferior goods called Giffen goods. Economists disagree whether or not the Giffen good actually exists in a real world situation. A Giffen good is an inferior good that consumers purchase more of as price rises, violating the law of demand.

In the past, economists claimed that potatoes were a Giffen good during the potato famine in Ireland. However, the lack of potatoes in the country means that it was impossible for consumption to increase as price increased. Some economists believe rice was a Giffen good in China when subsidies were lifted. They claim that even though the cost of rice increased, rice remained the least expensive source of calories and was therefore purchased in greater quantities.

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pleonasm
Post 3

I might not be understanding it correctly, and maybe it only applies to broad categories of goods like "potatoes" and "rice" but I would have thought there were a few Giffen goods around.

Like cheap shoes for example. A lot of people will buy shoes based on how expensive they are rather than the quality of the shoe, simply because they have nothing to go on except the quality of the shoe. So if you put up the price of a low quality shoe (which would ordinarily be an inferior good) I would think more people would buy it, making it a Giffen good.

pastanaga
Post 2

It's a shame that public transportation is treated as an inferior good. I think in some ways they are beginning to overcome this by adding value to the experience, like those buses that offer free wireless connections during the trip. That way, you gain something by taking the bus, rather than just save money. You gain time to do work (or muck around) on the internet.

This is a good thing, as more people using public transport means less pollution and less traffic congested roads.

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