Normal Goods 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

These are goods whose demand decreases when the consumers’ income increases. Examples could be second-hand clothes, rice, potatoes, etc. This is because their demand falls with the availability of higher quality alternatives.

The word inferior, in this context, 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 rice for meat. Consequently, the consumers view these goods as inferior.

Giffen Goods

These are inferior goods whose negative effect outweighs the positive substitution effect when prices decrease. As a result, a decrease in the prices of these goods causes a decrease in their quantity that is consumed and vice versa.

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 vice versa.  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.

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.

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

Question

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

A. normal;

B. inferior; or

C. substitute.

Solution

The correct answer is A.

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.