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When you read the term ‘inferior goods’ some might think that this refers to the quality of goods. On the contrary, this is an economic term used to indicate the price point of the goods. This term points to affordability of the goods and not their quality.
What are inferior goods?
An inferior good is a product which sees a drop in demand when the income of consumers rises. When consumes have less income, they tend to purchase inferior goods over normal goods to save money.
For example, as a consumer, you may enjoy visiting a popular retail store for your weekly grocery shopping, where you get multiple options and can choose what meets your taste. However, if your income reduces, you are likely to shift to purchasing from local stores or other lesser-known brands to keep expenses low.
Here are some examples of inferior goods:
The weekend restaurant visits to fancy fine and dine restaurants will change to local restaurant visits where the food is offered at a lower price point and is of equally good quality.
Transport can also be considered as an inferior good. People with income to spare will travel in their personal vehicles during an economic contraction. But since fuel prices are high, a majority will opt for public transport which is the cheaper mode of transport.
Note: This is not always true for B2B businesses. For example, the benefits of PTL services especially practically and convenience, are often the reason to opt for it, and not expense point alone.
- Holiday stays
People generally choose to stay in small hotels, lodges and dormitories to save money on their travel. When there is a slash in income the number of people booking their stays in resorts and luxury hotels decreases.
Groceries are daily essentials for every household. There are people who buy groceries from local kiranas while the rest like to shop for the same at supermarkets and convenience stores, or even wholesale and retail stores (note: wholesale is economical, whereas retail is pricier). When income is low people go to local kirana stores as the prices for commodities here are lower compared to supermarkets.
Types of goods
Economics studies a lot of different kinds of consumer goods. Here are two types of goods that usually appear while studying inferior goods:
- Normal goods
A normal good is a product for which demand rises as the incomes rise. Simply put, when a person’s wages increase, they purchase more normal goods, and when a person’s wages decrease, they buy fewer normal goods.
When consumers earn more, they tend to go out more, increase their budget for restaurant visits, increase the number of holidays, etc. But when the incomes decrease, they tend to buy inferior goods.
- Giffen goods
Giffen goods are those goods whose demand increases even when there is an increase in the price of the commodity. For example, when the price of cooking oil increases people still buy cooking oil by cutting down on other expenses. The same is the case with people who refuse to change certain brands they use even if the prices rise.
Inferior goods vs normal goods
Have a look at the differences between inferior goods and normal goods:
|Inferior goods||Normal goods|
|Demand for inferior goods rises when income earned by people are lower and dips when the income is higher||Demand for normal goods rises when incomes are higher and dips when the income is lower|
|These goods are preferred when incomes are lower||Normal goods are preferred when income is higher|
|Products purchased out of necessity||Normal goods can be purchased by people as a status symbol|
|These are sought after when there is an economic recession and decreased consumer spending||Normal goods witness a spike in demand when there is an economic boom and increased consumer spending|
|Examples include groceries, branded clothes, etc.||Examples of normal goods include clothes from the street vendor, products from local kiranas, etc.|
Inferior goods vs giffen goods
Have a look at the differences between inferior goods and giffen goods:
|Inferior goods||Giffen goods|
|Demand increase when income earned by consumers are low||Demand increases when the prices are high|
|There are a lot of alternate products for each inferior goods||You cannot find easy substitute for a giffen goods|
|This can include non-necessity items like electronic goods||Only necessity items like milk, rice, sugar, cooking oil, etc.|
Normal, inferior and giffen goods come under consumer goods and are studied as a part of economics. Demand for these goods is driven by economic conditions and the resulting consumer behaviour.
However, some customers choose to purchase normal goods even in an economic recession and some choose inferior goods even if incomes are high.