In microeconomics, an inferior good is a good whose demand changes in a certain way as a result of a change in income on the part of consumers. In most cases, these are low-value products that are replaced by higher-quality products as income rises.
In this lesson we explain the typical characteristics of an inferior good and their importance in the field of microeconomics. We delimit it to the superior good and explain the connection with the income elasticity. At the end you have the opportunity to test your knowledge with several exercise questions.
English: Inferior good
Why should you know inferior goods?
With regard to sales planning and the assessment of demand, it is important to be able to distinguish “inferior goods ” from “normal goods”. In this way, decisions can be made with regard to diversification or your own range of products, taking into account both current and possible future income situations.
For example, it can be advantageous to supplement a comparatively inexpensive product with a higher-quality variant in order to be able to serve the higher demands of consumers with increasing incomes.
Typical characteristics of inferior goods
According to the current definition, an inferior good has the property of being less in demand as income rises. This effect, which at first appears paradoxical, is due to the fact that consumers, who can also afford more with higher incomes and who actually have to ask more for a good, fall back on goods of higher value. Mostly these are substitute goods.
Examples of inferior goods
Below you will find a number of inferior goods that are replaced by other, higher-value goods in the course of an increase in income. These are also referred to as “ superior goods ”, the typical characteristic of which is that they are in greater demand as incomes rise.
In the comparisons mentioned here, the first of the two mentioned products is the inferior, the second the superior good.
|inferior good||is replaced by||superior good|
|Bread from the supermarket||Bread from the baker|
Example: branded products
An example is also provided by various manufacturers of branded products who at the same time offer significantly cheaper no-name items.
If the average income within an economy rises, these no-name products often turn out to be inferior goods. Since the manufacturer also offers superior goods in the form of expensive branded products or variants, it compensates for the decline in sales of inferior goods.
Inferior goods and income elasticity
According to photionary.com, the income elasticity of demand is an indicator of how much demand for a product or service changes if household incomes change at the same time.
The income elasticity is calculated as follows:
On the basis of the income elasticity, goods can be divided into inferior, normal, necessary and luxury goods. In the case of an inferior good, the income elasticity is by definition negative.
Whether a good is to be classified as normal or inferior is not directly related to the good itself, but to external circumstances, which include prices and personal preferences in addition to the level of income.
A certain product can therefore represent a completely normal good with a low income and only become an inferior good when income rises.
The definition of the inferior good is not always uniform in the literature. An approach that deviates from the definition mentioned above is that a normal good is referred to as a relatively inferior good if its demand increases disproportionately with increasing income.
A good is called a superior good whose sales increase disproportionately under the same conditions. All the definitions have in common is that the demand for an inferior good always decreases with increasing income.