{"id":31212,"date":"2021-09-21T07:30:28","date_gmt":"2021-09-21T07:30:28","guid":{"rendered":"https:\/\/analystprep.com\/cfa-level-1-exam\/?p=31212"},"modified":"2026-04-06T07:21:41","modified_gmt":"2026-04-06T07:21:41","slug":"normal-and-inferior-goods","status":"publish","type":"post","link":"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/normal-and-inferior-goods\/","title":{"rendered":"Normal and Inferior Goods"},"content":{"rendered":"\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"VideoObject\",\n  \"name\": \"Topics in Demand and Supply Analysis (2023 Level I CFA\u00ae Exam \u2013 Economics \u2013 Module 1)\",\n  \"description\": \"This video explores microeconomic concepts such as demand elasticity, substitution effects, income effects, diminishing marginal returns, breakeven points, and economies of scale. It uses relatable examples, like grocery shopping and manufacturing, to simplify complex topics and guide viewers through key calculations and interpretations for financial analysis.\",\n  \"uploadDate\": \"2022-03-09T00:00:00+00:00\",\n  \"thumbnailUrl\": \"https:\/\/img.youtube.com\/vi\/g7wPVGgRfVc\/maxresdefault.jpg\",\n  \"contentUrl\": \"https:\/\/www.youtube.com\/watch?v=g7wPVGgRfVc\",\n  \"embedUrl\": \"https:\/\/www.youtube.com\/embed\/g7wPVGgRfVc\",\n  \"duration\": \"PT28M37S\"\n}\n<\/script>\n\n<script type=\"application\/ld+json\">\n{\n  \"@context\": \"https:\/\/schema.org\",\n  \"@type\": \"QAPage\",\n  \"mainEntity\": {\n    \"@type\": \"Question\",\n    \"name\": \"If the income elasticity of a good is positive but less than one, then you would most likely classify this good as:\",\n    \"text\": \"If the income elasticity of a good is positive but less than one, then you would most likely classify this good as:\",\n    \"answerCount\": 3,\n    \"acceptedAnswer\": {\n      \"@type\": \"Answer\",\n      \"text\": \"Normal.\"\n    },\n    \"suggestedAnswer\": [\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Inferior.\"\n      },\n      {\n        \"@type\": \"Answer\",\n        \"text\": \"Substitute.\"\n      }\n    ]\n  }\n}\n<\/script>\n\n\n\n<iframe loading=\"lazy\"\n  width=\"611\"\n  height=\"344\"\n  src=\"https:\/\/www.youtube.com\/embed\/g7wPVGgRfVc\"\n  title=\"YouTube video player\"\n  frameborder=\"0\"\n  allow=\"accelerometer; autoplay; clipboard-write; encrypted-media; gyroscope; picture-in-picture; web-share\"\n  referrerpolicy=\"strict-origin-when-cross-origin\"\n  allowfullscreen>\n<\/iframe>\n\n\n\n<h2><strong>Normal Goods<\/strong><\/h2>\n<p>Normal goods are goods whose demand increases with an increase in consumers\u2019 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.<\/p>\n<div style=\"margin:20px 0\">\n<a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\"\nstyle=\"display:block;width:100%;text-align:center;padding:10px;border:2px solid #2f5bea;border-radius:40px;font-size:16px;color:#2f5bea;text-decoration:none\">\nPractice demand and income elasticity questions with our free trial.\n<\/a>\n<\/div>\n<h2><strong>Inferior Goods<\/strong><\/h2>\n<p>Inferior are goods whose demand decreases when the consumers\u2019 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.<\/p>\n<p>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.<\/p>\n<h2><strong>Giffen Goods<\/strong><\/h2>\n<p>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.<\/p>\n<p>Logically, if one is very poor and the price of a basic food item increases, without a corresponding increase in one&#8217;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\u2019s economy, but it is still theoretically possible.<\/p>\n<h2><strong>Veblen Goods<\/strong><\/h2>\n<p>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.&nbsp; 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.<\/p>\n<p>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.<\/p>\n<h2><strong>Comparison Charts for Normal and Inferior Goods<\/strong><\/h2>\n<p>$$<br>\\begin{array}{l|c|c}<br>\\textbf{Basis of Comparison} &amp; \\textbf{Normal Goods} &amp; \\textbf{Inferior Goods} \\\\<br>\\hline<br>\\text{Meaning} &amp; \\begin{array}{c} \\text{Goods whose demand rise} \\\\ \\text{when consumers\u2019 income rises} \\end{array} &amp; \\begin{array}{c} \\text{Goods whose demand decline} \\\\ \\text{when consumers\u2019 income rises} \\end{array} \\\\<br>\\hline<br>\\text{Income Elasticity} &amp; \\text{Positive but less than one} &amp; \\text{Negative i.e. less than zero} \\\\<br>\\hline<br>\\begin{array}{c} \\text{Relationship between income} \\\\ \\text{changes and the demand curve} \\end{array} &amp; \\text{Direct relationship} &amp; \\text{Inverse relationship} \\\\<br>\\end{array}<br>$$<\/p>\n<h2><strong>Substitution and Income Effects<\/strong><\/h2>\n<p>Note how substitution effect and income effect affect normal and inferior goods.<\/p>\n<p>$$<br>\\begin{array}{l|c|c}<br>\\textbf{} &amp; \\textbf{Substitution Effect} &amp; \\textbf{Income effect} \\\\<br>\\hline<br>\\text{Normal Goods} &amp; \\begin{array}{c} \\text{More of good is bought because} \\\\ \\text{it is relatively cheaper as} \\\\ \\text{compared to its substitutes} \\end{array} &amp; \\begin{array}{c} \\text{More is bought because an} \\\\ \\text{increase in the purchasing} \\\\ \\text{power increases consumption} \\end{array} \\\\<br>\\hline<br>\\text{Inferior Goods} &amp; \\begin{array}{c} \\text{The good is cheaper so more} \\\\ \\text{goods are purchased} \\end{array} &amp; \\begin{array}{c} \\text{Less inferior goods bought in} \\\\ \\text{favor of preferred substitutes} \\\\ \\text{when real income increases} \\end{array} \\\\<br>\\end{array}<br>$$<\/p>\n<blockquote>\n<h3><strong>Question<\/strong><\/h3>\n<p>If the income elasticity of a good is positive but less than one, then you would <em>most likely<\/em> classify this good as:<\/p>\n<ol style=\"list-style-type: upper-alpha;\">\n<li>normal.<\/li>\n<li>inferior.<\/li>\n<li>substitute.<\/li>\n<\/ol>\n<p><strong>Solution<\/strong><\/p>\n<p>The correct answer is <strong>A<\/strong>.<\/p>\n<p>The income elasticity of a normal good is positive but less than one.&nbsp;This means that the demand increases with an increase in consumers\u2019 income.<\/p>\n<\/blockquote>\n<div class=\"notes_inv\"><hr>\n<p><a href=\"https:\/\/analystprep.com\/cfa-level-1-exam\/economics\/learning-sessions-curriculum-economics\/\"><em>Economics &#8211; Learning Sessions<\/em><\/a><\/p>\n<\/div>\n<div style=\"text-align:center;margin:40px 0\">\n<a href=\"https:\/\/analystprep.com\/free-trial\/\" target=\"_blank\"\nstyle=\"display:inline-block;padding:10px 26px;background:#3f78d7;color:#fff;border-radius:40px;font-size:16px;text-decoration:none\">\nStart Free Trial \u2192\n<\/a>\n<p style=\"margin-top:10px;max-width:600px;margin-left:auto;margin-right:auto;font-size:14px\">\nSolve CFA-style questions on normal and inferior goods, income elasticity, and consumer demand behavior.\n<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>Normal Goods Normal goods are goods whose demand increases with an increase in consumers\u2019 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&#8230;<\/p>\n","protected":false},"author":15,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[4],"tags":[],"class_list":["post-31212","post","type-post","status-publish","format-standard","hentry","category-economics","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Normal vs Inferior Goods Explained | CFA Level 1 Economics<\/title>\n<meta name=\"description\" content=\"Normal goods see increased demand as consumer income rises, while inferior goods experience decreased demand with higher income. 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