Inferior Good: Definition, Examples, and Role of Consumer Behavior

If their income rises and they have a few extra dollars to spend each month, they may choose to buy organic bananas. Demand for a normal good increases when people’s incomes start to increase, giving it a positive income elasticity of demand. Other examples of inferior goods are grocery store-brand products such as bread, milk, eggs, cereal, or peanut butter.

Instead, it marks the change in consumer preferences due to income growth and their instant switch to more affordable goods. Conversely, as income levels decrease (moving down along the Y-axis), the quantity demanded increases (moving right along the X-axis). When consumers start making a profit or changing their socioeconomic status, they tend to switch to more expensive products, resulting in inferior goods. The concept of inferior goods meaning has no bearing on the product or service quality.

5 common examples of inferior goods include inexpensive food, cheap cars, public transportation, generic brands, and payday loans. Inferior goods are products or services that see a decrease in demand as consumer income increases. In other words, when people have more money to spend, they typically opt for higher-quality or more expensive alternatives.

• The concept of inferior goods meaning has no bearing on the product or service quality.
• So they may spend more money on rice because that’s all they can afford to buy, even if the price keeps rising.
• In reality, numerous generic products are derived from big brands and sold under a generic label at a lower price.
• These goods remind us that spending habits aren’t static; they shift with circumstances, blending practical needs with personal preferences.
• Giffen goods are rare forms of inferior goods that have no ready substitute or alternative.
• Both coffee brands cater to a vast consumer base; however, they represent distinct tiers within the overall coffee market.

Normal goods have a direct relationship with changes in income and demand. Consider two cars, A and B, for sale and priced at ₹5 lakh and ₹10 lakh. Both vehicles share the similar purposes, but their features are slightly different. In the preceding example, automobile A is a lower-quality good for those with lower earnings. Even so, it remains a common good for those who cannot afford to purchase hingher priced automobiles with more features. HDTVs could be normal goods in developing countries, whereas it would be considered inferior goods in developed countries as they have moved on with 4K TVs.

This phenomenon can be explained by the fact that as people’s financial situation improves, they might opt for more costly substitutes instead of inferior goods. Understanding the role and significance of inferior goods is essential for investors, businesses, and individuals alike. As we continue to explore this economic concept further, we’ll delve deeper into its implications and differences with normal and luxury goods. Stay tuned for more informative content on inferior goods, including examples, consumer behavior analysis, and their impact on the global economy.

Are inferior goods always low-cost items?

For example, something as simple as fast food may be considered an inferior good in the U.S., but it may be deemed a normal good for people in developing nations. A normal good is one whose demand increases when people’s incomes start to increase, giving it a positive income elasticity of demand. Some of us may be more familiar with some of the everyday inferior goods we come into contact with, including instant noodles, hamburger, canned goods, and frozen dinners. When people have lower incomes, they tend to buy these kinds of products. But when their incomes rise, they often give these up for more expensive items.

Different types of goods – Inferior, Normal, Luxury

Products such as meat, on the other hand, become luxuries, as they become far too expensive and out of reach. When you have more money, you may also choose to attend different entertainment events or fly first class as opposed to opting for cheaper, inferior travel options. Consider the hotel you may stay at, depending on the state of your personal finances. A motel by the airport may be an inferior good you choose when you have less income. A boutique luxury hotel may be a superior good you select when your income is plentiful.

Inferior goods are items for which consumer preferences decrease as consumers earn more. Low-cost products that aren’t as good as “normal goods” or “necessities” are often food and household items that aren’t branded. For an inferior good example, if a person is given a pay cut, they may buy inferior goods that are less costly than standard goods. Some examples are buying cereal, pulses and peanut butter from the grocery store that don’t have a brand name instead of buying from a supermarket.

Inferior goods, on the other hand, are more about practicality and value for money, helping people stay within their budgets. As income shifts, people adjust where they fall on this spectrum, sometimes moving from luxury items down to necessities or from normal goods to inferior ones. Moreover, understanding inferior goods can provide valuable insights into market trends and consumer preferences. On the other hand, McDonald’s coffee is often perceived as a budget-friendly alternative when consumers face financial constraints or during periods of economic downturn. In such situations, McDonald’s coffee serves as a superior substitute for more expensive coffee brands.

Examples of Inferior Good

When people’s incomes are low, they may opt for public transportation instead of more costly options like taxis or owning a car. However, as income example of inferior goods increases, the demand for inferior goods decreases, and consumers choose to upgrade their transportation methods. The demand for inferior goods is mostly determined by consumer behavior. Due to their affordability, such goods are consumed by consumers with low income.

Income elasticity measures the responsiveness of the quantity demanded to a change in disposable income (Cateora, Philip R. Marketing Management). Inferior goods have a negative income elasticity of demand because their demand decreases as income rises. The role of brands comes into play when discussing the concept of inferior goods.

A McDonald’s coffee may be an inferior good compared to a Starbucks coffee. When a consumer’s income drops, he may substitute his daily Starbucks coffee for the more affordable McDonald’s coffee. On the other hand, when a consumer’s income rises, he may substitute his McDonald’s coffee for the more expensive Starbucks coffee. Conversely, demand for inferior goods increases when incomes fall or the economy contracts. When this happens, inferior goods become a more affordable substitute for a more expensive good. Unlike normal goods, the demand for inferior goods decreases as income increases, whereas normal goods experience an increase in demand with rising income.

Inferior Goods: Definition, Characteristics & Examples

For consumers, being aware of this economic concept can help them make informed decisions regarding their spending habits as their income changes. Another interesting example of inferior goods comes from the realm of transportation. When income levels are low, individuals may opt for public transport or carpooling instead of owning their vehicles outright. However, as disposable income increases, consumers might upgrade to a private vehicle, demonstrating the relationship between income and consumer preferences (Mankiw et al., 2014). Inferior Goods vs. Normal Goods vs. Luxury GoodsTo fully grasp inferior goods, it is essential to understand how they differ from normal and luxury goods. Normal goods experience an increase in demand when income rises, while luxury goods are non-essential items that become more desirable as income increases.

Giffen goods are products whose demand increases even as their prices rise. It occurs primarily due to a lack of choices in specific categories of products. As a result, people should continue to buy these goods regardless of how much the prices rise. Lower-income or economic disasters, on the other hand, drive the market for inferior goods rather than pricing.

• Moreover, understanding inferior goods can provide valuable insights into market trends and consumer preferences.
• This article explores the essential characteristics of inferior goods, their distinctions from normal goods, common examples, and their influence on consumer habits.
• Other examples of an inferior good are no-name grocery store products such as cereal or peanut butter.
• Conversely, in prosperous times, companies may focus on promoting normal goods to capitalize on increased consumer spending.

As economic conditions improve, consumer behavior shifts again, with individuals seeking higher-quality goods that offer better status or utility. This transition often leads to increased spending on discretionary items, benefiting businesses that cater to these preferences. Companies must closely monitor changes in demand to align their strategies with evolving consumer priorities and accurately capture revenue trends.

But since fuel prices are high, a majority will opt for public transport which is the cheaper mode of transport. Budget clothing retailers that offer lower-quality garments at affordable prices are another example. When consumers have higher incomes, they may choose to shop at higher-end retailers for more durable and fashionable clothing options. These products are frequently significantly less expensive than their brand-name counterparts, but they are typically made using the same ingredients or at the same level of quality. In reality, numerous generic products are derived from big brands and sold under a generic label at a lower price. Some consider fast food to be an inferior good, even though many consumers, regardless of income level, enjoy it.