An inferior good means an increase in income will causes a fall in demand. An inferior good has a negative income elasticity of demand. (YED)
For example, if average incomes rise 10%, and demand for holidays in Blackpool falls 2%. The YED of Blackpool holidays is -0.2 – an inferior good.
Inferior goods will have better quality alternatives. Therefore, when income rises, people can afford to forego the cheap alternative and buy the higher quality good instead.
For example, a person on low income may buy cheap gruel. But, when his income rises, he will afford better quality foods, such as fine breads and meat. Therefore, he stops buying gruel.
Examples of inferior good
- ‘Supermarket own brand’ goods. E.g. Tesco value bread 32p a loaf. When income rises you buy better quality, more expensive bread.
- Tinned meat / spam, corned beef. This is a cheap form of meat, when income rises you buy fresh meat and less of the tinned variety.
- Instant coffee. When income rises you buy expensive bread instead.
- Bus travel. When income rises you can afford to buy a car and therefore no longer need the car.
- Butlin family holidays in Skegness. In the post-war austerity years, these budget holidays were very popular. But, rising incomes enabled people to travel abroad and to be able to afford hotel rooms, rather than the more basic accommodation.
Importance of inferior goods
In a recession, with falling incomes, inferior goods can become in higher demand. Supermarkets may push these cheaper, value ‘inferior’ goods because there will be higher demand. Recessions, can be good for Pound Shops, which concentrate on value goods. However, rising incomes can lead to falling demand for inferior goods and firms will increase supply of the alternatives better quality goods.