Definition
Normal goods are items whose demand rises with an increase in a consumer’s income and falls with a decrease in income. On the other hand, inferior goods are items whose demand falls as consumers’ incomes rise and increases when incomes fall. The quality, desirability, and price of the product often play a role in determining whether a good is considered normal or inferior.
Key Takeaways
- Normal goods are those whose demand increases with an increase in consumer’s income. They are directly proportional to income, indicating that as the income level of individuals rises, the demand for these goods also intensifies.
- Inferior goods, on the other hand, are those goods whose demand decreases with an increase in consumer’s income. They are inversely proportional to income such that when the consumers income increases, they tend to buy less of these goods.
- The distinction between normal and inferior goods is crucial for businesses and economists, as it helps them understand consumer behavior, market dynamics and in setting pricing strategies. For example, during economic downturns, the sale of inferior goods may increase, whereas the demand for normal goods may drop
Importance
The distinction between normal goods and inferior goods is central in understanding consumer behavior and market dynamics in the field of economics.
Normal goods are those whose demand increases with an increase in consumers’ income, reflecting their direct relationship with income levels.
On the other hand, inferior goods are those whose demand decreases as consumers’ income rises.
This relationship can be counterintuitive given that as people become wealthier, they generally buy fewer inferior goods, replacing them with either normal or luxury goods.
Therefore, this concept helps economists and businesses to anticipate market changes and trends depending on fluctuations in income levels and economic booms or slowdowns, enabling better decision-making in production, pricing, and marketing strategies.
Explanation
The terms normal goods and inferior goods are integral concepts in consumer demand analysis, utilized primarily to understand the kind of effect an income change could have on the consumption pattern of consumers. Normal goods hold relevance as they allow economists and businesses to anticipate market dynamics. When an individual’s income increases, they tend to buy more of what are called normal goods, reflecting higher living standards.
Thus, understanding what constitutes normal goods for various income groups can help businesses align their product offerings more accurately. On the other hand, an increase in income would result in decreased consumption of inferior goods, as they are typically associated with lower quality. For example, a firm selling luxury products may identify an increase in consumer incomes as a beneficial market condition for its normal goods, anticipating higher demand.
In contrast, a business that deals in inferior goods should consider such a situation as a possible threat due to the expected decrease in demand. Therefore, the concept of normal and inferior goods aids firms in identifying market opportunities, strategizing marketing efforts, and planning their production and inventory management accordingly. This knowledge also guides policy-making, as decisions related to taxation, minimum wage standards, and other income-affecting policies can be made with a clearer picture of their potential impact on consumers’ purchasing behavior.
Examples of Normal Goods vs Inferior Goods
Clothing: Designer clothes can be considered normal goods, as people’s demand for these items tends to increase as their income rises. They might buy from high-end brands like Gucci, Chanel, or Prada when they have more disposable income. On the contrary, clothing from budget-friendly stores like Walmart or second-hand clothes can be seen as inferior goods. When consumers’ income decreases, they may resort to these cheaper options.
Food: A fancy, organic grocery store such as Whole Foods Market may sell normal goods. As people earn more, they often spend more on organic, gluten-free, or locally sourced food. On the other hand, instant ramen noodles or canned food can be considered as inferior goods – they are often consumed more when incomes are tight, and less so when consumers have more disposable income to spend on fresh, organic, or restaurant meals.
Transportation: Cars can be normal goods or even luxury goods for some individuals who buy more expensive models or brands as their income rises. On the other hand, using public transportation can be considered an inferior good. When their income is limited, people might rely on buses, trains or subways rather than owning and maintaining a car. When their income rises, they may switch to using their own cars or even hiring private transportation.
FAQ: Normal Goods vs Inferior Goods
What are Normal Goods?
Normal goods are any goods for which demand increases when consumers’ income increases, and falls when consumers’ income decreases but price remains constant, i.e. with a positive income elasticity of demand.
What are Inferior Goods?
Inferior goods are types of goods for which demand declines as the level of income in the economy increases. They are the opposite of normal goods, which are goods for which demand increases as the level of income in the economy increases.
What are some examples of Normal Goods?
Normal goods can include any type of good or service that sees an increase in demand due to an increase in income. Examples may include dining at high-end restaurants, designer clothing, and luxury vehicles.
What are some examples of Inferior Goods?
Inferior goods are those goods for which the demand lessens as the income of the consumer increases. Examples might include instant noodles, canned goods, or public transport – as people’s income increases, they are likely to opt for fresh food, higher-quality products, or even purchase a car instead.
How does the demand for Normal Goods and Inferior Goods change with income?
The demand for normal goods increases when incomes rise and decreases when incomes fall. However, the demand for inferior goods falls when incomes rise and increases when incomes fall.
Related Entrepreneurship Terms
- Income Effect
- Substitution Effect
- Consumer Behavior
- Demand Curve
- Price Elasticity of Demand
Sources for More Information
- Investopedia – A trusted, comprehensive financial education platform that includes articles on various economic concepts including Normal Goods vs Inferior Goods.
- Corporate Finance Institute – Offers a range of educational resources on finance topics including the difference between Normal Goods and Inferior Goods.
- Khan Academy – A free online learning resource offering many economics and finance courses, including the topic of Normal Goods vs Inferior Goods.
- University of Oklahoma Department of Economics – The department offers a variety of economic resources, which are helpful for understanding concepts like Normal Goods and Inferior Goods.
