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In economics, inferior goods are those goods the demand for which falls with increase in income of the consumer. So, there is an inverse relationship between income of the consumer and the demand for inferior goods. [1] There are many examples of inferior goods, including cheap cars, public transit options, payday lending, and
In economics, elasticity measures the responsiveness of one economic variable to a change in another. [1] For example, if the price elasticity of the demand of a good is −2, then a 10% increase in price will cause the quantity demanded to fall by 20%.
As a result, the relationship between elasticity and revenue can be described for any good: [38] [39] When the price elasticity of demand for a good is perfectly inelastic (E d = 0), changes in the price do not affect the quantity demanded for the good; raising prices will always cause total revenue to increase. Goods necessary to survival can ...
Giffen goods should not be confused with Veblen goods: Veblen goods are products whose demand increases if their price increases because the price is seen as an indicator of quality or status. The classic example given by Marshall is of inferior quality staple foods , whose demand is driven by poverty that makes their purchasers unable to ...
High elasticity indicates that consumers will respond to a price rise by buying much less of the good. For examples of elasticities of particular goods, see the article section, "Selected price elasticities". The elasticity of demand usually will vary depending on the price.
The Income elastitcty of demand thus allows goods to be broadly categorised as Normal goods and Inferior goods. A positive measurement suggests that the good is a normal good, and a negative measurement suggests an inferior good. The Income elasticity of demand effectively represents a consumers idea as to whether a good is a luxury or a necessity.
The most commonly used elasticity in economics, the price elasticity of demand, is almost always negative, but many goods have positive income elasticities, many have negative. A negative income elasticity of demand is associated with inferior goods; an increase in income will lead to a fall in the quantity demanded.
A Giffen good is a product that is in greater demand when the price increases, which are also special cases of inferior goods. [5] In the extreme case of income inferiority, the size of income effect overpowers the size of the substitution effect, leading to a positive overall change in demand responding to an increase in the price.