User:EconEditorUQs/Inferior good

Inferior Goods

Direct relations can thus be drawn from inferior goods to socio-economic class. Those with constricted incomes tend to prefer inferior goods for the reason of the aforementioned observable inferiority.

Income and Substitution Effect

The shift in consumer demand for an inferior good can be explained by two natural economic phenomena: The substitution effect and the income effect. These effects describe and validate the movement of the demand curve in (independent) response to increasing income and relative cost of other goods.

Income Effect

The income effect describes the relationship between an increase in real income and demand for a good. The result of the income effect for a normal good is discernible to that of an inferior good in that a positive income change causes a consumer to buy more of a normal good, but less of an inferior good. The increase in real income means consumers can afford a bundle of goods that give them higher utility and contain a lower number of inferior goods. Consumers thus choose to decrease their consumption of inferior goods when real income increases, showing the relation between inferior goods and the income effect.

An item such as non-branded grocery products are common inferior goods. There is no set criteria of what constitutes an inferior good, but economists refer to an inferior good as any item preferred less when disposable consumer income increases.

Substitution Effect

The substitution effect occurs due to a change in relative prices between two or more goods. For both normal and inferior goods, a price increase will lead to a reduction in quantity consumed of the good due to substitute goods being relatively cheaper. Consumers substitute the good in which the price has increased for either cheaper goods of the same observed quality or increase their consumption of other inferior goods.

Overall Change in Demand for an Inferior Good

The income and substitution effects work in opposite directions for an inferior good. When an inferior good’s price decreases, the income effect reduces the quantity consumed, whilst the substitution effect increases the amount consumed. In practice, it has been observed that the substitution effect is usually larger than the income effect due to the small amount of gross income used by consumers on any given good, and thus the change in demand is usually insignificant in comparison to the substitution effect.