Inferior goods decrease in demand as income increases, while normal goods increase in demand. Public transportation is an example of an inferior good. The income effect is negative for inferior goods, but the substitution effect causes a slight increase in consumption. Giffen goods are rare and controversial, with potatoes and rice being possible examples.
Inferior goods are goods that experience a decrease in demand when the consumer’s income increases. The opposite of inferior goods are normal goods that experience an increase in demand when the consumer’s income increases. These concepts come from consumer theory in microeconomics that relates preferences to demand curves. Consumer theory uses models to represent hypothetical demand patterns for individual buyers.
An example of an inferior good is public transportation. Typically, public transportation is used by those who cannot afford a personal vehicle and the expenses that come with owning it. Personal vehicles offer a decrease in transportation time and the added convenience of not having to stick to the bus schedule. An increase in income allows for the purchase or lease of a vehicle, auto insurance, gas, and regular maintenance. When this happens, the use of public transport is abandoned in favor of the use of the car, the normal good.
Economists use the term elasticity of demand to refer to the change in demand for an item as income increases. Inferior goods are said to have a negative income elasticity of demand. By contrast, normal goods have a positive elasticity of demand.
Another economic term used with normal and inferior goods is the income effect. The income effect is the idea that consumers will buy more of a certain good as the price of the good falls. In the case of a normal good, there is a positive income effect because a consumer with the same level of income can pay more for the good. The income effect is negative with an inferior good, but another effect, called the substitution effect, causes a slight overall increase in consumption of the inferior good as the price falls.
There is an extremely rare type of inferior goods called Giffen goods. Economists disagree on whether or not the Giffen good exists in a real world situation. A Giffen good is an inferior good that consumers buy more of as the price increases, violating the law of demand.
In the past, economists claimed that potatoes were a Giffen good during the Irish potato famine. However, the lack of potatoes in the country means that it was impossible for consumption to increase as the price increased. Some economists believe that rice was a Giffen good in China when the subsidies were lifted. They claim that even though the cost of rice increased, rice remained the least expensive source of calories and was therefore purchased in greater quantities.
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