When faced with reduced income levels, consumers may switch from the higher-end coffee shop to the more affordable McDonald’s option. Conversely, once their financial situation improves and they have more disposable income, they might make the reverse decision. Consumers will generally prefer cheaper cars when their income is constricted. As a consumer’s income increases, the demand for the cheap cars will decrease, while demand for costly cars will increase, so cheap cars are inferior goods.
This section will delve deeper into how various aspects of consumer behavior influence the demand for inferior goods, including changes in preferences, income levels, and socio-economic status. Inferior goods represent an intriguing economic concept where demand decreases as income rises or when the economy improves. These goods are a contrast to normal and luxury goods whose demands increase under similar circumstances. While inferior goods may be perceived as lower quality, it’s essential to understand that this is not always the case. Inferior goods serve a purpose in our economic landscape by providing affordable substitutes during times of financial hardship or economic contraction. Transportation and TravelTransportation is another area where inferior goods play a role.
Are inferior goods always low-cost items?
Moreover, only the consumer’s spending power and priorities can ascertain which service or product is normal and which is inferior. In addition to normal goods, Giffen goods, and luxury goods, inferior goods are among the four product categories. A demand curve shows how a change in one item affects the demand for another. The inferior goods demand curve, for example, reflects the disparity in levels of income and consumer tastes, as well as the effect on demand. Food, household goods, clothing, and other similar items are normal goods or key considerations. Normal goods can differ in price, but they frequently have lower-priced goods that consumers can buy if their income does not enable them to buy the higher-priced example of inferior goods normal goods.
Conversely, increased demand for inferior goods might point towards a downturn or economic contraction (Tobin, 1980). Another defining characteristic is their negative income elasticity of demand, which measures how demand responds to income changes. For instance, if the income elasticity of demand for a brand of instant noodles is -0.5, a 10% increase in income would lead to a 5% drop in demand for that product. Despite having a sizable monthly income, some people refuse to switch to branded products and continue to purchase stuff from no-name stores.
Income-demand relationship
However, this relationship can shift as consumers’ income rises and their preferences change. This dynamic interplay between brands and income levels further highlights the importance of understanding consumer behavior and adapting offerings accordingly (Dholakia & Urmila, 2016). Impact of Consumer Behavior on Demand for Inferior GoodsConsumer behavior plays a crucial role in understanding demand for inferior goods. Understanding how income elasticity comes into play is essential for both individuals and businesses.
They tend to be lower-cost options people rely on when they need to save but might trade up from when they’re in a better financial position. An inferior good occurs when an increase in income causes a fall in demand. (YED) Inferior goods are characterised by low quality – and are goods with better alternatives. Brands can also be considered inferior goods, with McDonald’s coffee being a prime example compared to Starbucks coffee. When consumers have lower incomes, they may opt for the more affordable McDonald’s brew instead of the pricier Starbucks coffee.
An inferior good is a category of products whose demand falls as consumers’ income rises. When people start earning well or their socioeconomic standing changes, they switch to more expensive products, making such goods they used to buy less desirable. Instead, it denotes a transition in customer preferences to other goods based on affordability. Inferior and normal goods are two opposite terms and remain interrelated based on consumer desire, affordability, and behavior. The former is a class of products and services whose demand decreases with the consumer income level.
In addition, such products belong to multiple categories, including groceries, transportation, dining, accommodations, etc. Grocery store-brand products provide an insightful example of how inferior goods are not necessarily of lower quality. Many of these goods come from the same product line or use the same ingredients as the more expensive brand-name goods. Normal, inferior and giffen goods come under consumer goods and are studied as a part of economics.
Luxury vs. necessity goods within the spectrum
Customers with less expendable income are more likely to take public transportation such as trains and buses. Once their income increases, they may decide to purchase a car rather than rely on public road transport. Improvements in public transport, for example, make it a more attractive choice, even for people who could afford a car. Affordable, tech-friendly options like streaming services also become more appealing, potentially shifting them into the realm of “normal” goods over time. As access to practical, low-cost solutions increases, perceptions of inferior goods continue to evolve. While some inferior goods may cost less, they can still be of good value and serve their purpose well.
As opposed to eating a steak for dinner, an individual may opt for an inferior product, such as canned meat or frozen food. However, some customers choose to purchase normal goods even in an economic recession and some choose inferior goods even if incomes are high. When you read the term ‘inferior goods’ some might think that this refers to the quality of goods. On the contrary, this is an economic term used to indicate the price point of the goods. The word inferior relates often not to the product’s quality but to its price and the value placed by the buyers. In some inferior good examples, the quality is lower than the corresponding normal good, but in others, it’s the same.
Contrasting with normal goods
Inferior goods, such as these, serve to cater to specific market segments based on income levels and economic conditions. As consumers’ financial situations change, their preferences for brands may also evolve, illustrating the dynamic nature of the relationship between consumers, income, and branded products. The main feature of inferior goods is their unique income-demand relationship. For example, if someone’s income falls, they might switch from buying organic produce to more affordable grocery store brands. But when their income goes up again, they often return to pricier options.
She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies.
- For instance, if the income elasticity of demand for a brand of instant noodles is -0.5, a 10% increase in income would lead to a 5% drop in demand for that product.
- As these consumers see their incomes rise or the economy improve, they may choose to upgrade from McDonald’s coffee to Starbucks coffee.
- This would make them want more and make people want less of normal goods.The demand for inferior goods grows when incomes are less but decreases when the incomes rise.
- Take your business to the next level with seamless global payments, local IBAN accounts, FX services, and more.
- In some countries, public transportation is common regardless of income, while in others, it’s mainly used by those looking to save.
Definition and SignificanceAn inferior good is defined as a product whose demand decreases when the buyer’s income rises or the economy improves. This concept can be puzzling at first, but it holds significant implications for both individuals and businesses. Inferior goods represent an affordability shift, not necessarily a decrease in quality. They are opposite to normal goods, which have a positive relationship between income and demand. Economic crises like the 2008 financial crisis or the COVID-19 pandemic had a huge impact on consumer behavior worldwide.
These examples illustrate how economic downturns push consumers toward inferior goods as they adapt their spending to make the most of what they have. Furthermore, grocery store brand products can also serve as examples of inferior goods. Despite their lower prices compared to name-brand counterparts, these items are not always considered of lesser quality.
- During these times, many people lost income and turned to more affordable choices.
- A normal good is one whose demand increases when people’s incomes start to increase, giving it a positive income elasticity of demand.
- Different groups have different spending priorities, and inferior goods fill these needs in various ways.
- Companies offering off-brand products focus on cost leadership strategies, managing production and supply chain efficiencies to maintain profitability.
- So they may spend more money on rice because that’s all they can afford to buy—even if the price keeps rising.
For example, individuals might move from relying on public transportation to owning personal vehicles as their financial situation improves. As incomes rise, demand for these goods declines because consumers can afford higher-quality, more desirable alternatives. For example, a consumer might choose fresh produce over canned goods when their financial situation improves. An inferior good is a category of products whose demand declines as consumer income rises. When a country’s economy grows, so does its citizens’ income, causing them to move to more expensive alternatives or brands while disregarding those they previously used to purchase. “Inferior good” is an economic term that refers to an item that becomes less desirable as the income of consumers increases.
Inferior vs Normal Goods
Consumers may purchase these cheaper generic brand products when their incomes are lower, and make the switch to popular brand-name products when their incomes increase. When their incomes rise, they may stop riding the bus and, instead, take taxis or even buy cars. Groceries are among the most common examples of inferior products because food is a constant necessity that must be acquired. For example, as a consumer, you may enjoy visiting a popular retail store for your weekly grocery shopping, where you get multiple options and can choose what meets your taste. However, if your income reduces, you are likely to shift to purchasing from local stores or other lesser-known brands to keep expenses low. Knowing how customers act and demand and supply is critical for businesses that produce inferior goods.