The main objective to be achieved in this section is to be in a position to distinguish normal goods and inferior goods. In this context, you should be in a good position to state the distinguishing factors. One should also clearly differentiate Giffen goods from Veblen goods.
Definition of main terms
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 increases in income. Examples of goods are furniture, clothes, and automobiles.
These are goods whose demand decreases when the consumers’ income increases. An example is the demand for second-hand clothes. Their demand falls with the availability of quality alternatives. The word inferior, in this case, does not mean substandard goods. It relates to the affordability of such goods. As income increases, consumers demand for such goods falls. Consequently, the consumers view these goods as inferior. Other Examples of inferior goods are rice, potatoes etc.
These are inferior goods whose negative effect when price decreases outweighs the positive substitution effect. As a result, a decrease in the price of these good causes a decrease in the quantity consumed while an increase in the price causes an increase in the consumption of the goods.
These are almost the same as Giffen goods except for the fact that they are not inferior goods. An increase in the price of a good causes an increase in the amount consumed and vice versa. These are goods of prestige. Therefore, an increase in the consumption of such goods is due to the perception that consuming more of such goods conveys a higher status.
Comparison charts for Normal and inferior goods
Point to note
Note how substitution effect and income effect affect normal and inferior goods
If the cross-price elasticity between two goods is negative, the two goods are classified as:
The correct answer is C.
The consumption of complements rises or falls together. For negative cross-price elasticity, an increase in the price of one good causes the demand for both to go down.
Reading 14, LOS 14c:
Distinguish between normal goods and inferior goods.