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.