Why should we Understand Normal and Inferior Goods?

Understanding a normal good and an inferior good is important because it tells us what will happen to demand different products during booms and recessions.

Definition of a Normal and an Inferior Good

A good that experiences an increase or decrease in demand due to the rise or fall in consumers’ income is a “normal good”.

A good that experiences a decrease in demand due to the rise in consumers’ income is an “inferior good”.

Let us discuss, in detail, the features of normal and inferior goods.

Normal Good

Let us take the example of buying luxury brands of clothing. When an individual’s income rises, the individual is more inclined to buy items from a luxury brand. We can observe a positive correlation between income and demand. Here, the prices remain constant.

In other words, if there is an increase in the income of an individual, demand for normal goods increases. This income change will impact the purchasing power of the consumer. In microeconomics, this change in demand for a good or service caused by the change in the consumer’s income is referred to as the “income effect”.

The patterns of consumer behavior determine the consumer demand for normal goods. In the case of normal goods, the income effect is positive.

Examples of Normal Goods

Luxury goods such as expensive and high-end automobiles, high-end electronic goods such as phones and laptops, designer perfumes and outfits, vacations, dining at high-end restaurants are a few examples of normal goods.

Scenario

Ahamed, a Cyber Security specialist, currently earns USD 7000 per month. His main expenses are on food and the repayment of the mortgage of his car and home. His spending on clothing is a mere 5% of his income. Ahamed had to take a 15% wage cut during the pandemic days and his expenditure on food decreased by around 10%. Dining out became very less and Ahamed chose to cook food more often.

What does this indicate? The quantity demanded of a product has decreased with a decrease in consumer income. This is typical of a normal good.

Inferior Good

An inferior good shows characteristic that is opposite of a normal good.

An inferior good is one whose demand decreases as the consumer's income rises. In other words, consumer demand for inferior items is inversely proportional to their income. In the case of inferior items, the income effect is negative. 

Plotting the Demand versus Income for Normal and Inferior Goods

Let us plot the demand of a normal good concerning income change. Plot the Demand on the x-axis and the income of the consumer on the y-axis. The graph shows an upward sloping line, indicating that with the income rise of the consumer, the demand also increases.

In the case of the graph for an inferior good, the graph shows a downward sloping line indicating that as the consumer’s income rises, he/she prefers to change to another brand of the product.

In simple words, if you consume less of a product when there is an increase in your income, the product is an inferior good. It is inferior because it gives you less satisfaction and you switch to better products when your budget permits. The term “inferior good” is just an economic term and does not apply to the quality of the good.

Examples of Inferior Goods

Public transportation: When your income decreases, you start using public transport rather than hailing cabs because it is less expensive.

Scenario

On Isabella’s grocery list, a certain brand of cereals was a regular. When Isabella received a 15% increase in her wages, she decided to switch to a different variety of cereals, which was slightly more expensive. What does this indicate? The quantity demanded of Cereal A has decreased with an increase in consumer income. This is typical of an inferior good.

What are Giffen Goods and Veblen Goods?

Giffen Goods

Are there any inferior goods whose demand does not come down even if the prices go up? What about potatoes? What about salt?

Yes, there exists a type of inferior goods that have no quick substitute or alternative such as bread, rice, and potatoes. These goods are different from traditional inferior goods in the aspect that the demand for these goods increases even when their prices increase despite the decrease in consumers’ income. These goods are referred to as Giffen Goods.

Veblen goods

Sometimes, we do see an increase in demand for a good with a price increase. Imagine owning exclusive diamond jewelry. The owner of this piece of jewelry feels proud and sees it as a status symbol because only a few can afford to own it. These goods whose demand increases with price increase are called Veblen Goods.

Graphic Representation of Normal and Inferior Goods

If we plot the quantity demanded on the x-axis and income level on the y-axis, we get an upward-sloping curve for a normal good and a downward sloping curve for an inferior good.

Comparative Chart to Know the Difference Between Normal and Inferior Good

What is Elasticity of Demand?

In Economics, we use the term “Elasticity of demand” or demand elasticity to refer to the responsiveness of demand to changes in price. Understanding the concept of demand elasticity will give you a better perspective to differentiate between normal and inferior goods.

There are two types of Elasticity of Demand—Elastic Demand and Inelastic Demand.

A small change in the price of good changes the demand for the good, considerably. This is elastic demand. For example, a small price reduction of an Apple Phone may trigger more demand.

When the demand for a product does not change even if there is a change in the price, this is referred to as inelastic demand. Essential commodities like bread and milk exhibit inelastic demand.

Price Elasticity and Income Elasticity

Price Elasticity

As per economic definitions, “Price elasticity of demand is a quantity of the receptiveness of the demand for a commodity to changes in its price”.

In other words, the price elasticity of demand for a commodity is defined as the percentage of change in demand for the commodity divided by the percentage change in its price.

Mathematically writing this:

$$PriceElasticityofDemandforagood=\frac{\%Change\mathrm{in}demandofgood}{\%Change\mathrm{in}priceofgood}$$

Income Elasticity

The relationship between a change in the quantity demanded a particular good and a change in real income of the consumer is defined as Income Elasticity.

It can also be defined as the ratio of change in quantity demanded to the change in customer income.

Mathematically, this can be expressed as:

$$IncomeElasticityofDemandforagood=\frac{\%changeinquantitydemanded}{\%changeinconsumerincome}$$

Context and Applications

This topic is significant in the professional exams for both graduate and undergraduate courses –

• BA Economics
• BA Economics Honors
• MA Economics