Economics Terms A-Z
Inferior Goods & Giffen Goods
Usually, consumers will buy more of an item when it becomes cheaper or when their income increases. This basic fact of economics stems from the laws of supply and demand. When demand for a good follows this typical price and income behavior, we refer to it as a normal good. But not every good follows this intuitive behavior.
An inferior good is an item that consumers buy less of as their income rises; they have a negative income elasticity of demand. These goods are usually of cheaper, lower quality than comparable items that a consumer might want to buy, but can’t afford. For most inferior goods, though, price elasticity of demand behaves similarly to normal goods; when the price increases, consumers buy less of these goods. Thus, inferior goods do not violate the basic law of demand.
Examples of inferior goods include cheap but unhealthy food items like instant noodles. Imagine that a consumer really likes noodles, but has a tight budget. Because of this, they eat instant noodles fairly often. As usual for most goods, when the price of instant noodles rises, the consumer will be able to afford less of them.
But, when this consumer’s income rises, the consumer may be able to afford a trip to a ramen restaurant or a purchase of hand-made noodles instead of buying more instant noodles. This brings them an increase in utility, since they only eat instant noodles when they cannot afford a better noodle experience. Thus, instant noodles are an inferior good for this consumer. Although it does bring them some utility, other experiences are more preferable. As soon as the consumer has the means to get a better experience, they will demand less of the inferior one.
This is just one example; most inferior goods follow this pattern, but not all. Giffen goods are one subtype of inferior goods that behave differently. They are named after Scottish statistician Sir Robert Giffen, who is credited with first describing them.
Consumers buy less of Giffen goods as their income rises, as usual for inferior goods. The difference is that consumers will buy more of a Giffen good (proportionally to their income) as its price rises. Therefore, Giffen goods exhibit a negative income elasticity of demand – like inferior goods – but a positive price elasticity of demand, like certain luxury goods (specifically Veblen goods). Giffen goods are usually staple food products that people rely on to survive, like rice and wheat.
This confusing behavior is best illustrated by an example. Consider a poor laborer in a low-income region whose diet mainly consists of rice. When the price of rice rises, the laborer has little choice but to spend more of their income buying it, because they need the same amount of rice to survive regardless of the price. Thus, their consumption of rice increases as a proportion of their total income. Meanwhile, their consumption of other goods falls, as they have less cash left to buy non-essentials.
But, when the laborer’s income rises - perhaps from a pay raise - they have an increased budget and can afford other things. The portion of their income spent on rice falls (like a regular inferior good). They may buy less rice in absolute terms too, perhaps if some of the new goods they can afford include more nutritional types of food.
For more on inferior goods as they relate to the income elasticity of demand, see the article on that topic. To compare inferior and Giffen goods to normal goods and luxury goods, see the linked article. Most goods in the real world fall into one of these four categories – normal, inferior, luxury, or Giffen goods – so it’s helpful to be familiar with each of them.
Good to Know
Inferior and Giffen goods tend to be purchased more frequently by low-income consumers who have little choice given their budget. In general, goods are more likely to be a Giffen good when there is a lack of close substitute goods in the market. Normally, if a good’s price increases (for example, butter), consumers can substitute away from that good into something similar but cheaper (like margarine).
Lack of a close substitute, or lack of income, may mean that consumers can’t do this. Instead, they are forced to either give up on the utility that the good would have provided, or pay more for it and reduce their consumption of other goods.
- Economics Terms A-Z
Normal Goods & Luxury Goods