Goods for which the demand drops when consumers' income rises.
Inferior goods are goods for which the demand drops when consumers' income rises. There are different examples and other categories we will delve into and criteria today. The different types of goods are normal, luxury, Giffen, and inferior.
As you can see, as the consumer's income increases, the demand for normal goods also rises. But conversely, the need for these goods increases as the consumer has less money.
Likewise, these all apply to vice-versa situations, as the same would hold true if the roles were reversed. In addition, as you will see, the consumer's mentality and ensuring their needs are met usually the driving forces in these examples.
Understanding the difference between these goods can benefit someone trying to save money. Given that many of these items are closely linked with others, it is important to understand how they differentiate.
These differences between each kind of good and the demands they entail will be some of the items discussed today.
Types of Goods
When it comes to goods, there are many different types. The most important ones are normal, inferior, and luxurious. The difference between these goods is based on many other factors branching from the consumer.
Factors from the state of the market to where you live at a specific time affect how you consume goods.
Many of the ways consumers are affected and the impacts on the charts are the demands and supplies relative to each one. So today, we will get into each good and how they benefit the consumer.
Without many of these goods being at different prices and income levels, they would have no value.
These goods, from normal to luxury, all use the consumer in some way. Therefore, we as consumers need to understand which goods are which, how their prices can go up or down depending on when someone is buying them, and for what purpose.
Normal goods are ones where if our income as consumers increases, the subsequent demand for these goods increases. As mentioned before, in simpler terms, as the consumer's income increases, their demand for normal goods increases as well.
This allows the consumer to buy certain goods in larger quantities, more often relative to their demand or need for the good.
Normal goods are necessary to our daily routines, so much so that each of us probably owns them in our lives. There are many examples of normal goods and how they relate to inferior ones. Some examples of normal goods are:
Normal goods drive everyday monetary policy and are the main reason there is diversity in the market. Without normal goods, the drive wants to level up from normal to more luxurious and even have its category in luxury goods.
Like normal goods, these goods are essential to the economy. As mentioned before, these goods decrease in demand as the consumer population's income rises. These items are usually slightly extenuating and often provide more work for the consumer.
They decline in demand as the consumer gains more income due to being able to afford better alternatives now. Some examples include:
Groceries (Frozen or canned food)
Generic brand clothing
Inferior goods are less than normal goods in terms of necessity. However, these goods are the foundation of consumer items for people who are not as well off as others, which is just about everyone at some point in their journey to financial independence.
For example, if you eat a normal good of pasta noodles for dinner, the inferior good would be ramen noodles. However, if you now have more money, you will make pasta on your own instead of buying cheap ramen noodles.
These goods are often a secondary option and could be more useful to people with more money and better alternatives.
Similar to previous goods, except that they truly do not have a substitute, their demand will always be high, no matter the consumer's income.
This is because these items are irreplaceable and necessary, so consumers would pay whatever the list price is.
Examples of Giffen Goods are:
Giffen Goods truly had an effect during the COVID-19 Pandemic, as toilet paper was one of the most demanded items in stock, as they were flying off the shelves with no real substitute except sandpaper.
Giffen goods also require using most of your income to purchase that item at that particular time in certain instances.
This idea can result from a desperate need for a said item given a certain circumstance, such as in a pandemic or before a tropical storm. It can also be part of their weekly budgetary concerns to ensure they have the proper funds for the week's groceries.
Luxury goods are often goods we, as consumers, do not need to live or even be happy with. Think of these products as inferior-type goods without a real substitute. The price of these items and their relation to their quantity demanded is of an inverse relationship.
These products only often increase demand when the market is primed for them. Consumers have enough disposable income to bypass any inferior or normal goods they normally buy. Examples of luxury goods are
Expensive clothes and accessories
People often get these items later in life, as they have saved enough income to afford them. So when starting off earning an income as a consumer, it is smart not to go after a high-end car when you should be getting a cheap one.
Each year we see the return on luxury goods growing. As more people have more money to spend, they buy more of these luxury items. The relationship is exponential; subsequently, consumers can afford fewer luxury goods as incomes go down.
Even the common term "luxury cars," such as Lexus, BMW, Mercedes, and Audi, are always more expensive than Toyotas, Hyundais, and Hondas.
Why are these goods necessary?
In the grand scope of all kinds of goods in this world and the values we assign to them, it is important to understand how necessary they are. Under the umbrella of goods, these goods are extremely important, and it only fits the title of this article.
As mentioned before, these goods are often major substitutes for more expensive brands. They are way more accessible to consumers of lower income and allow them to purchase products for themselves and their livelihoods while saving money.
It is important to understand that most of us are not born into financial independence and trust fund wealth, so goods labeled inferior are important and necessary to many of us in the journey of our lives.
In lower-income countries, such as the second and third world, inferior goods are empirical. So, for example, someone with more money would buy steak for dinner, and someone with less may go down the ground beef route instead.
There are many examples of this, especially in the world of food, as it can get very expensive very quickly, and people, no matter their income, need to eat.
The same idea holds true for technology, where people of higher incomes will always be in-tune and updated on the latest new devices hitting the market.
Conversely, people with less money would likely be more inclined to settle for an android or flip phone, as it is all they can afford.
The behavior of consumers and its effect on inferior goods
As explained before but being touched on in more detail now, the demand for these goods is a converse relationship, which means as incomes go up, the demand goes down. This is because these goods are heavily dependent on consumer behavior.
It is a shared belief that, as a society, we want to see the most growth and prosperity for the most people.
It only shows that not everyone can be rich; there will always be winners and losers, which ultimately drives the demand for these goods to be consumed.
More often than not, an unfavorable economic, or even climatic event related to weather, can lead to higher demand for inferior kinds of goods.
We see this especially up north when a hurricane or blizzard is on the horizon, as people rush to stores to get items like gasoline, sandbags, and more of these items, as the timetable for their use and price in which they make sense for the consumer.
In many cases, which has become more common, consumers who have built up their wealth to the point where they can easily afford normal or even luxury goods often stick with these goods anyway.
For example, if you had an employee who made $500 a week and spent half or more of their paycheck on a new $370 bag, it would mean more to them, and even if their pay were increased to $700 a week, they would stick with the first bag instead of buying a $600 one.
The idea of comfortability and commonality in items consumers choose to keep and consume is often good for the inferior goods market.
In totality, there are different variations in how inferior goods are perceived in the public eye. For someone eating Burger King most of their life, switching to a daily or weekly Chipotle is probably not the best idea for their bank account.
People will usually stick to what they are accustomed to, and when a price requires more income to purchase, the demand will go even further down, exemplifying an inferior good.
Essentially, these goods were put here on this earth based solely on people's subjective views. Because of this, they are not based on the actual quality of their item but rather seen as a less costly substitute.
They are also seen as not adding additional value, which, unfortunately, is not good for its overall demand.
Inferior goods from country to country vary. For example, some countries are more technologically and financially advanced, so certain goods will be more common in those countries than others.
The same goes for lower-income countries, whose goods will be cheaper than those of higher-income due to the various economic states.
As another example, most people would classify fast food as an inferior good, especially in the United States, the fast food capital of the world. However, fast food is very expensive in some other countries.
This shows that the demand for a normal good versus that of an inferior one increases as income levels increase in a nation.
Now that we have covered what inferior and other types of goods are, it is important to understand why these demands go up and down and their relationships with each good. The ability for these goods to either be replaced easily or not at all determines how in need they truly are.
The understanding comes from the term elasticity, which is essentially the responsiveness of the consumer subject to different price changes relative to demand. These responses are either significant or not, given the good and how in demand it may be.
In simpler terms, if something is elastic, it responds much more to price changes than inelastic goods. This is because inelastic goods often don't have many substitutes, such as oil; for example, people will pay whatever price is at the pump because they need to drive.
The same goes for certain medicines, as the price could increase. Still, unfortunately, in serious cases, people will pay whatever, no matter the price, out of their necessity for certain medications.
Inelastic goods often come out of necessity, and the change in demands of people buying remains mostly the same.
On the other hand, elastic goods, such as inferior goods, often have substitutes but respond very much to changes in price because of the different income levels being able to buy now or not depending on their need.
That increase and decrease in demand very drastically show the elasticity of these goods and why the idea plays so much of a role in their performance.
These goods are the opposite of elastic. So as the price of the consumer's income goes up, they will buy less and less.
Elasticity, by contrast, would be normal goods; the demand for the item and its supply go up. As incomes rise, more people will buy normal goods.
In most cases, tangible items, such as fancy cars and clothes, are. In other cases, many people would argue that some luxury goods are intangible, such as time, freedom, and happiness. Either can be correct.
It can be tangible or intangible, depending on which luxury item you are talking about.
Everything You Need To Master Valuation Modeling
To Help You Thrive in the Most Prestigious Jobs on Wall Street.
Researched and authored by Daniel Bartels | LinkedIn
or Want to Sign up with your social account?