A. rises as its price rises
B. falls as its price rises
C. rises as its price falls
D. is perfectly inelastic
Correct Answer:
Option A – rises as its price rises
Explanation:
An inferior good is an economic term that describes a good whose demand drops when people’s incomes rise. This occurs when a good has more costly substitutes that see an increase in demand as incomes and the economy improve.
Inferior goods—which are the opposite of normal goods—are anything a consumer would demand less of if they had a higher level of real income. They may also be associated with those who typically fall into a lower socio-economic class.
Inferior goods are associated with a negative income elasticity, while normal goods are related to a positive income elasticity.
It’s important to note that the term inferior good refers to its affordability, rather than its quality, even though some inferior goods may be of lower quality.
Understanding Inferior Goods
In economics, the demand for inferior goods decreases as income increases or the economy improves. When this happens, consumers will be more willing to spend on more costly substitutes. Some of the reasons behind this shift may include quality or a change to a consumer’s socio-economic status.
Conversely, the demand for inferior goods increases when incomes fall or the economy contracts. When this happens, inferior goods become a more affordable substitute for a more expensive good. Most often than not, there is not a quality difference.
Examples of Inferior Goods
There are many examples of inferior goods. Some of us may be more familiar with some of the everyday inferior goods we come into contact with, including instant noodles, hamburger, canned goods, and frozen dinners. When people have lower-incomes, they tend to buy these kinds of products. But when their incomes rise, they often give these up for more expensive items.
Coffee is also a good example. A McDonald’s coffee may be an inferior good compared to a Starbucks coffee. When a consumer’s income drops, he may substitute his daily Starbucks coffee for the more affordable McDonald’s coffee. On the other hand, when a consumer’s income rises, he may substitute his McDonald’s coffee for the more expensive Starbucks coffee.
