Neutral good

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This article is about an economic term. For Dungeons & Dragons-related term, see Neutral Good.

In economics, neutral goods are goods whose demand is independent of income. Such goods have substitution effects but not income effects.

Examples of neutral goods include prescription medicines for people with medical conditions, such as insulin for diabetics. Although an individual's income may vary, their consumption of vital prescription medicines will remain constant. This means demand for these goods is perfectly inelastic; the income effect equals the substitution effect. Arguably illicit drugs would fit into this category as anecdotally poor addicts will go to great lengths such as prostitution, theft and robbery to gain the income to pay for their addiction.

An alternative definition says that a good is a neutral good if the consumer does not care about its consumption at all. That is, the consumption of that good will not increase the consumer's utility. For example, if a consumer likes texting, but not data package on his phone contract (i.e. data package is the neutral good here), then increasing the amount of data allowance will not increase his utility. An indifference curve, constructed such that Data Allowance is measured on Y axis and Texting is on X axis, will be a vertical line.[1]

References[edit]

  1. ^ Hal R. Varian, Intermediate Microeconomics: A Modern Approach, Seventh Edition, Norton, 2006