Limited Time Offer: Save 10% on all 2021 and 2022 Premium Study Packages with promo code: BLOG10    Select your Premium Package »

# Normal and Inferior Goods

## Normal Goods

Normal goods are goods whose demand increases with an increase in consumers’ income. Note that the rate at which demand increases is lower than the rate at which income increases. The rate eventually slows down with further increments in income. Examples of goods are furniture, clothes, and automobiles.

## Inferior Goods

Inferior are goods whose demand decreases when the consumers’ income increases. Examples could be second-hand clothes, canned foods, public transportation, etc. This is because their demand falls with the availability of quality alternatives.

The word inferior, in this case, does not mean substandard goods. Instead, it relates to the affordability of such goods. As income increases, consumer demand for such goods falls because consumers might, for example, substitute secondhand clothes for new clothes. Consequently, the consumers view these goods as inferior.

## Giffen Goods

These are inferior goods whose negative income effect outweighs the substitution effect. That is, an increase in the prices of these goods causes an increase in the quantity that is consumed and less when the price decreases.

Logically, if one is very poor and the price of a basic food item increases, without a corresponding increase in one’s purchasing power, then one ends up buying more of the basic food item because it is the only thing one can afford. Since everyone does the same thing, its price keeps increasing. Some evidence suggests that Giffen goods are not often seen in today’s economy, but it is still theoretically possible.

## Veblen Goods

These goods are mostly for prestige i.e., they are ornamental. Their examples include such goods as expensive cars and high-end watches. Therefore, an increase in the prices of these goods causes an increase in the amount consumed and not less.  An increase in the consumption of such goods is due to the belief that consuming more of the goods bestows a higher socio-economic status upon the consumer.

In general, a Veblen good is generally a high-quality, coveted product, as opposed to a Giffen good, which is an inferior product that cannot be easily replicated.

## Comparison Charts for Normal and Inferior Goods

$$\begin{array}{l|c|c} \textbf{Basis of Comparison} & \textbf{Normal Goods} & \textbf{Inferior Goods} \\ \hline \text{Meaning} & \begin{array}{c} \text{Goods whose demand rise} \\ \text{when consumers’ income rises} \end{array} & \begin{array}{c} \text{Goods whose demand decline} \\ \text{when consumers’ income rises} \end{array} \\ \hline \text{Income Elasticity} & \text{Positive but less than one} & \text{Negative i.e. less than zero} \\ \hline \begin{array}{c} \text{Relationship between income} \\ \text{changes and the demand curve} \end{array} & \text{Direct relationship} & \text{Inverse relationship} \\ \end{array}$$

## Substitution and Income Effects

Note how substitution effect and income effect affect normal and inferior goods.

$$\begin{array}{l|c|c} \textbf{} & \textbf{Substitution Effect} & \textbf{Income effect} \\ \hline \text{Normal Goods} & \begin{array}{c} \text{More of good is bought because} \\ \text{it is relatively cheaper as} \\ \text{compared to its substitutes} \end{array} & \begin{array}{c} \text{More is bought because an} \\ \text{increase in the purchasing} \\ \text{power increases consumption} \end{array} \\ \hline \text{Inferior Goods} & \begin{array}{c} \text{The good is cheaper so more} \\ \text{goods are purchased} \end{array} & \begin{array}{c} \text{Less inferior goods bought in} \\ \text{favor of preferred substitutes} \\ \text{when real income increases} \end{array} \\ \end{array}$$

### Question

If the income elasticity of a good is positive but less than one, then you would most likely classify this good as:

1. normal.
2. inferior.
3. substitute.

Solution

The income elasticity of a normal good is positive but less than one. This means that the demand increases with an increase in consumers’ income.

Featured Study with Us
CFA® Exam and FRM® Exam Prep Platform offered by AnalystPrep

Study Platform

Learn with Us

Subscribe to our newsletter and keep up with the latest and greatest tips for success
Online Tutoring
Our videos feature professional educators presenting in-depth explanations of all topics introduced in the curriculum.

Video Lessons

Sergio Torrico
2021-07-23
Excelente para el FRM 2 Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
diana
2021-07-17
So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts. The fun light-hearted analogies are also a welcome break to some very dry content. I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
Kriti Dhawan
2021-07-16
A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them. Thank you ! Grateful I saw this at the right time for my CFA prep.
nikhil kumar
2021-06-28
Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
Marwan
2021-06-22
Great support throughout the course by the team, did not feel neglected
Benjamin anonymous
2021-05-10
I loved using AnalystPrep for FRM. QBank is huge, videos are great. Would recommend to a friend
Daniel Glyn
2021-03-24
I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
michael walshe
2021-03-18
Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.