Inferior Commodity

Inferior Commodity Definition

An inferior commodity refers to a good for which demand decreases with an increase in the income of people. The income elasticity of demand is negative for inferior commodities. Inferior goods lose their importance when income and the economy improve, and as a result, consumers change their buying preference towards normal or non-inferior goods.

In economics, when income of people increases and the economy of a country grows, the demand for inferior goods decreases. Consumers prefer to buy expensive substitutes for these goods. The reasons for this preference shift are an increase in their income or a change in socio-economic status.

Inferior Goods and Income Elasticity of Demand

The income elasticity of demand (YED) measures the degree of responsiveness of quantity demand of a good to the change in the income of consumers. Here is the formula to calculate income elasticity of demand:

The answer of YED can help in determining the type of good.

• YED answer is positive for normal goods.
• YED answer is negative for inferior goods.
• YED answer is zero for very basic necessities.
• YED answer is positive and greater than one for luxuries.

Demand for Inferior Goods and Consumer Behaviour

Consumer behaviour and demand for these inferior goods are related to each other. Generally, the demand for inferior goods happens when consumers have low income levels or the economy contracts, but it is not always the same. Some people do not change their preference for expensive goods and keep buying inferior goods.

For example, a person gets an increment from their employer. Regardless of the increment, he keeps on buying MacDonald's brew as compared to Starbucks’s java because they may find a no-name grocery product better than expensive name-brands. This example depicts personal preferences.

Inferior goods are not always the same in different countries around the world. For example, simple fast food goods are considered inferior in the U.S., but they seem to be a normal good in developing countries. Normal goods are those whose demand increases when income increases, which gives a positive income elasticity of demand.

Inferior goods are the opposite of normal goods. When consumers have a high level of real income, anything falling into the inferior goods category will face decreased demand. The demand for inferior goods increases when the economy shrinks and incomes fall. In this situation, inferior goods are the only substitute for expensive goods at affordable prices.

The following diagram illustrates the negative or inverse relationship between income of consumers and the demand for inferior goods.

In the above graph, the quantity demanded is on the horizontal axis (x-axis), and income is on the vertical axis (y-axis). Consumer demand is inversely proportional to the income of the consumer. When income is at Y1, the quantity demanded is Q1. But when consumer income increases to Y2, the quantity demanded decreases to Q2. The demand curve D0 is a downward sloping straight line illustrating the negative relationship between income of people and the quantity demanded of inferior goods.

Examples of Inferior Commodities

There are many examples of inferior commodities; some of them are more familiar to us because we come into contact with these goods every day. These include frozen dinners, instant noodles, etc. When people have low income, they willingly buy such goods, but when income rises, they shift to expensive substitutes. Some of the examples of inferior commodities are given below:

Second-hand Products

Pre-loved or second-hand products are categorised as inferior commodities. These may be second-hand cars, used mobile phones, used cameras, used bikes, or second-hand garments and shoes. People with low income buy second hand products, but when their income increases, they switch to new products.

Groceries

As food is the basic necessity of daily life, groceries are the main example of inferior goods. The level of consumers’ buying varies from person to person. As a substitute for eating a steak for dinner, low-income consumers go for a substitute by buying frozen or canned meat for dinner at affordable prices. Also, consumers’ consumption patterns may vary differently. Consumers with low incomes are less likely to eat out in expensive five-star restaurants but prefer to opt for inferior methods of preparing foods, like preparing food at home on their own.

Public Transportation

Public transportation is also an example of inferior goods, as people prefer to ride public transport when they have low income levels. When their income increases, they stop travelling by public transport and buy cars or book taxis to move around. But buying a car is classified into different tiers, as a used Honda is considered inferior as compared to a Tesla. Everyday transportation can also be measured differently, either as a superior or inferior good. When you stay in a hotel, it shows how your finances are doing. People with high income levels prefer to travel first-class or attend entertainment events instead of opting for cheap travel options.

Brands

In terms of brands, MacDonald's coffee is an inferior product in front of Starbucks's coffee. But when consumers have low income levels, they lower their preferences from everyday Starbucks’s java to a cheaper MacDonald’s brew as an inferior good, but when income rises, they shift from this cheaper option to expensive Starbucks’s coffee.

Examples of inferior goods are those brands of stores that are not famous, such as peanut butter and cereals. People prefer to buy cheaper generic products when their income is low and prefer to shift their preference towards name-brands when their income rises. Inferior goods are not always of cheap quality, like grocery store brand products.

Types of Goods

In terms of the classification of goods and services in economics, the following are some types of goods which are closely related to inferior commodities:

Giffen Goods

These goods are a rare form of inferior goods, as they are expensive substitutes or alternatives. For example, bread, rice, and potatoes are examples of Giffen goods. The one and only distinction between inferior goods and Giffen goods is that the demand for Giffen goods increases even when the price increases, regardless of the consumer’s income levels.

Some goods are very important in areas where people live in low socio-economic classes. When the price of these goods increases, these people have no choice but to change their preferences but are bound to spend a large amount of income on buying them. For example, people buy rice because they have to buy rice even when prices rise. The purchase of meat is a luxury good for these people, who are unable to afford them and hence they stick to rice even in case of its price increase. Here are the key features of Giffen goods:

• Giffen goods are inferior goods.
• They violate the law of demand.
• They have expensive substitutes.

Normal Goods

A normal good or a non-inferior good, is the opposite of an inferior good. The demand for normal goods increases when consumer income increases. These goods have positive income elasticity of demand. For example, organic fruits are considered as normal goods. When the income of consumers increases and they have extra money left except for all expenditures, they prefer to buy organic fruits, like apples, bananas, etc. Bears, alcohol, and clothing are also some examples of normal goods.

Luxury Goods

These goods are not necessary or essential to life, but they are highly desired and are being purchased when consumers’ income increases. The ability to purchase luxury goods is directly dependent on an increase in consumer income or assets. Examples of luxury goods are cleaning and cooking services, luxury bags and luggage, and expensive, luxurious vehicles.

Veblen Goods

Veblen goods are the goods which people buy to display their wealth and social status. The sales of these goods increase with the increase in prices. Veblen goods violate the law of demand and are classified as luxury goods. For example, a piece of artwork which is worth $1 million can be considered as a Veblen good. Other examples can be luxury cars, expensive jewellery, expensive watches, and diamonds. People buy Veblen goods because they help them show their posh lifestyles. The demand for Veblen goods depends more on psychological factors than on their prices. 

Inferior Goods, Normal Goods, and Giffen Goods

The following table compares the main features of inferior goods, normal goods and Giffen goods.

Quality of Inferior Goods

Inferior goods are the ones that become less desirable when consumer income increases. They are the ones who have negative income elasticity of demand, but this doesn’t mean their quality is not good. As a matter of fact, they just change their buying preference from inferior goods to normal or expensive goods, not because of the quality of inferior goods but because of an increase in income levels.

Importance of Inferior Goods

It is very important for companies that produce inferior goods to understand consumer behaviour and the demand for these products. When consumers have less disposable income, they are willing to buy inferior goods, resulting in an increase in demand. In many economic conditions, the demand for inferior goods is stable. But during a recession, when a large number of people face a decrease in income, companies that produce inferior goods can easily estimate that demand for these goods will increase. In that case, these firms need to increase the production of inferior goods to meet higher demand.

Conclusion

In conclusion, inferior goods are those products whose demand decreases when consumer's income increases. Consumers prefer to invest in more luxury goods when there is an economic propensity. But when income levels decrease, they prefer to buy generic brands and low-quality products, avoid travelling on first-class planes, or do not prefer to eat in expensive restaurants. These people prefer to buy inferior goods.