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Inferior Goods

Goods whose demand shows an inverse relationship with the consumer’s income

What are Inferior Goods?

Inferior goods are a type of goods whose demand shows an inverse relationship with the consumer’s income. It means that the demand for the goods decreases with the increase in the consumer’s income or expansion of the economy (which generally will raise the income of the population).

 

Inferior Goods

 

The consumption of inferior goods is generally associated with people in the lower social-economic classes. Despite the association with the low-income parts of the population, there is no direct relation between the goods and their perceived low quality. Some inferior goods may be products of good quality but may come with substitutes with a higher price. The affordability of the goods is a key feature that attracts consumers with low income.

 

Inferior Goods and Consumer Behavior

The demand for inferior goods is mostly determined by consumer behavior. Due to their affordability, such goods are consumed by consumers with low income. However, when a consumer’s income increases, he or she can afford the more expensive substitutes. The shift can be explained by different reasons, such as higher quality (e.g., instant noodle vs. meat), additional features (e.g., feature phone vs. smartphone) or more prestigious socio-economic status (e.g., regular clothing vs. designer clothing).

In addition, not all consumers will cut consumption of inferior goods with the increase in income. Fast food is one example. Certain people prefer fast food, and they will not decrease their consumption due to their personal preferences.

At the same time, consumer behavior varies among countries and geographic regions. Consumer behavior is determined by various factors, including the prevailing traditions and geographic or climate characteristics. Therefore, certain goods can be considered inferior in one geographic region, while in the other region, the same goods will be considered normal.

 

CFI’s Course on Behavioral Finance Fundamentals explores how human behavior affects the field of Finance.

 

Examples of Inferior Goods

As it was mentioned earlier, examples of inferior goods may vary across different regions. Nevertheless, the most common examples include:

  • Cheap groceries (frozen food, canned food, instant noodles, etc.)
  • Fast food
  • Public transportation

 

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Consumer Surplus Formula
  • Purchasing Power Parity
  • Scarcity
  • Supply and Demand

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