An inferior good occurs when an increase in income causes a fall in demand. An inferior good has a negative income elasticity of demand. (YED) Inferior goods are characterised by low quality – and are goods with better alternatives.
For example, if average incomes rise 10%, and demand for holidays in Blackpool falls 2%. The YED of Blackpool holidays is -0.2. A holiday in Blackpool is an inferior good. When income rises, people can afford to forego the cheap alternative and buy the higher quality good instead. In this case, it is holidays abroad to Lanzarote.
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 bread and meat. Therefore, he stops buying gruel.
Examples of inferior good
- ‘Supermarket own brand’ goods. E.g. Tesco one coup tea 40 tea bags – 25p. When income rises you buy better quality, more expensive tea.
- 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 the supply of the alternatives better quality goods.