In economics, inferior goods are those goods the demand for which falls with increase in income of the consumer. So, there is an inverse relationship between income of the consumer and the demand for inferior goods. There are many examples of inferior goods, including subcompact economy cars, public transit, payday lending, second-hand clothes, and inexpensive food. The shift in consumer demand for an inferior good can be explained by two natural economic phenomena: the substitution effect and the income effect.
Description
In economics, inferior goods are goods whose demand decreases when consumer income rises (or demand increases when consumer income decreases). This behaviour is unlike the supply and demand behaviour of normal goods, for which the opposite is observed; normal goods are those goods for which the demand rises as consumer income rises. Thus, an inferior good is one for which the "income elasticity of demand...is observed to be negative."
Inferiority, in this sense, is an observable fact relating to affordability rather than a statement about the quality of the good. Indeed, the same good may be a normal good for one group of consumers and an inferior good for another group. For example, for moderate-income consumers, a BMW 3 Series car might be a normal good, but for an upper-income group, it might be an inferior good. As a rule, these goods are affordable and adequately fulfil their purpose, but as more costly substitutes that offer more utility become available, the use of the inferior goods diminishes. Direct relations can thus be drawn from the purchasing of inferior goods to socio-economic class. Those with constricted incomes tend to prefer inferior goods for the reason of the aforementioned lower cost. 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. A number of 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". Subcompact economy cars are another example of an inferior good. Consumers will generally prefer these relatively inexpensive cars, which have few options, when their income is constricted. As a consumer's income increases, the demand for the economy cars will decrease, while demand for more costly cars with more options will increase, so economy 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 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. Inexpensive foods like instant noodles, bologna, pizza, hamburger, mass-market beer, frozen dinners, and canned goods are additional examples of inferior goods. As people's incomes rise, they tends to purchase more expensive, appealing or 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, potatoes are 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. Cigarettes, before they became popular, were also inferior goods in the U.S. They were seen as cheap low-class versions of cigars and the depression of 1873 boosted their popularity.
Income and substitution effects
The shift in consumer demand for an inferior good can be explained by two natural economic phenomena: The substitution effect and the income effect. These effects describe and validate the movement of the demand curve in (independent) response to increasing income and relative cost of other goods.
Income effect The income effect describes the relationship between an increase in real income and demand for a good. Inferior goods experience negative income effect, where its consumption decreases when a consumer's income increases. The increase in real income means consumers can afford a bundle of goods that give them higher utility. Inferior goods are unlikely to provide the latter, thus why its consumption decreases.
Substitution effect
The substitution effect is the effect that a change in relative prices of substitute goods has on the quantity demanded. It is due to a change in relative prices between two or more substitute goods. When the price of a commodity falls and prices of its substitutes remain unchanged, it becomes relatively cheaper in comparison to its substitutes. In other words, its substitutes become relatively costlier. Consumers would normally like to substitute cheaper goods for costlier ones. Thus, the demand for relatively cheaper substitute commodities increases. Compared to normal goods, a price decrease (or increase) would actually decrease (or increase) the consumption of an inferior good. This is only possible if negative income effect is strong or large enough to outweigh the substitution effect.
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