What are inferior goods?

Inferior goods are goods that suffer a decrease in demand when the consumer's income increases. The opposite of inferior goods are normal goods that experience an increase in demand when the consumer's income increases. These concepts come from consumer theory in microeconomics that relates preferences to demand curves. Consumer theory uses models to represent hypothetical patterns of demand for individual buyers.

An example of an inferior good is public transport. Typically, public transport is used by those who cannot afford a personal vehicle and the expenses incurred in owning it. Personal vehicles offer a reduction in travel time and the added convenience of not having to meet bus schedules. An increase in income allows for the purchase or lease of a vehicle, car insurance, gas and regular maintenance. When this happens, the use of public transport is abandoned in favor of car use, the normal good.

Economists use the term elasticity of demand to refer to the change in demand for an item as income increases. Inferior goods are said to have a negative income elasticity of demand. On the other hand, normal goods have a positive elasticity of demand.

Another economic term used with normal and inferior goods is the income effect. The income effect is the idea that consumers will buy more of a given good as the price of the good falls. For a normal good, there is a positive income effect, as a consumer with the same income level can pay more for the good. The income effect is negative with an inferior good, but another effect, called the substitution effect, causes a slight overall increase in consumption of the inferior good as the price falls.

There is an extremely rare type of inferior goods called Giffen goods. Economists disagree on whether or not the Giffen good exists in a real-world situation. A Giffen good is an inferior good that consumers buy more of as the price rises, violating the law of demand.

In the past, economists claimed that potatoes were a Giffen good during the Irish potato famine. However, the shortage of potatoes in the country made it impossible to increase consumption as the price increased. Some economists believe rice was a Giffen commodity in China when subsidies were suspended. They claim that although the cost of rice has increased, rice has remained the cheapest source of calories and therefore has been purchased in greater quantities.

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