Difference Between Normal and Inferior Goods

Edited by Diffzy | Updated on: May 13, 2023

       

Difference Between Normal and Inferior Goods

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Introduction

Businesses produce and distribute different kinds of products, including normal and inferior goods, to satisfy their customers.

Normal goods are items purchased by consumers, such as clothing or food, that demonstrate a proportional connection between demand and income. Food and clothing are examples of normal goods.

On the other hand, an inferior good is a term used in economics to describe a good whose demand decreases when people's incomes rise. These goods become less desirable as incomes and the economy improves, and consumers begin to buy more expensive substitutes instead. In economics, the demand for inferior goods reduces when income increases or the economy strengthens. In such cases, consumers are more likely to spend money on more expensive alternatives. The quality or a change in the consumer's socioeconomic status are some of the reasons for this shift.

Despite having some similarities, normal and inferior goods possess distinct characteristics. Knowing about these categories and how they affect customer buying behavior can aid companies in making better business choices.

This article examines the main similarities and differences between normal and inferior goods, providing various illustrations for each type.

Normal Goods vs Inferior Goods

Normal and inferior goods are contrasting concepts that work in tandem with one another.

When a person's budget expands, they typically decrease their consumption of goods with lower utility and switch to more satisfying products. They transition from inferior goods to normal goods. Conversely, during economic downturns or periods of high unemployment rates, people tend to shift to lower-priced or inferior goods. This results in an increase in the demand for inferior goods and a decrease in the demand for normal goods.

When a consumer's income increases, the demand for normal goods also increases. The term "normal" or "necessary" doesn't refer to the quality of the good but instead to the level of demand for the good, which is linked to the consumer's income. Consumer behavior patterns determine the demand for normal goods, and when income levels rise, consumers can often afford to purchase goods that were previously beyond their means.

Inferior goods, which are the opposite of normal goods, include anything that a consumer would purchase less of if they had a higher real income. They may also be associated with people who usually belong to a lower socio-economic class.

Difference Between Normal and Inferior Goods in Tabular Form

The differences between normal and inferior goods are as follows:

PARAMETERS OF COMPARISONNORMAL GOODSINFERIOR GOODS
DefinitionNormal goods are goods whose demand increases as and when the income of consumers increases.Inferior goods are goods whose demand decreases as consumers’ income increases.
Relationship with incomeThe demand for normal goods is directly proportional and shares a positive relationship with income.The demand for inferior goods is inversely proportional to, and shares a negative relationship with income, i.e., purchasing power.
Income elasticityPositiveNegative
Consumer behaviourConsumers purchase more normal goods as income increases.Consumers purchase more inferior goods as income decreases.
Substitution effectSubstitution effect of normal goods is relatively higher than inferior goods.Substitution effect of inferior goods is low.
Price effectPrice effect of normal goods is low.Price effect of inferior goods is high.
QualityNormal goods are mostly characterised by high quality.Inferior goods are goods essential for basic subsistence, and of low quality.
ExamplesOrganic food, luxury goods like gold, silver, high-end and premium dining, personal transportationFast food, thrift shopping, cheap clothing, low-quality goods

While most of these differences stand true in the general context, certain variations and exceptions can be seen in specific contexts, and based on differing consumer behaviors.

What are Normal Goods?

A normal good pertains to the level of demand for a good with changing wages. It experiences an increase in demand as the income of consumers rises. Essentially, when a person's wages increase, they purchase more normal goods, and when their wages decrease, they purchase fewer normal goods.

A normal good exhibits a positive elastic relationship between income and demand. This implies that changes in income and demand move in the same direction. When consumers earn more, they are inclined to buy products at a higher price or indulge more in leisure activities, such as eating out. This leads to an increase in demand for normal goods as income rises.

Income Elasticity

Normal goods exhibit a positive income elasticity of demand, implying that a change in demand and a change in income move in the same direction.

The income elasticity of demand measures the extent to which the quantity demanded changes in response to a change in income. It is used to comprehend shifts in consumption patterns that arise due to changes in purchasing power.

A normal good has an income elasticity of demand that is positive, but less than one.

For instance, if the demand for blueberries increases by 11 percent when income increases by 33 percent, then blueberries have an income elasticity of demand of 0.33 (i.e., 11/33). Therefore, blueberries can be classified as a normal good.

Economists utilize the income elasticity of demand to identify whether a good is a necessity or a luxury item. Additionally, companies analyze the income elasticity of demand for their products and services to anticipate sales during economic expansions, which result in rising incomes, or during economic downturns and declining consumer incomes.

Examples of Normal Goods

Consumer behavior patterns determine the demand for normal goods, and when income levels rise, consumers can often afford goods that were previously beyond their means. Some examples of normal goods include food, clothing, entertainment, transportation, electronics, and home appliances.

Normal goods can be observed in groceries, where people may purchase organic vegetables and fruit, fresh herbs, and coffee beans as their incomes rise.

As consumers' budgets increase, they may prefer to dine out at higher-end restaurants instead of fast food places or choose local establishments over chain restaurants.

Transportation is also an example of a normal good, where people may opt for personal cars or other luxurious options when they have more disposable income.

Travel can also be classified as a normal good, as consumers with higher wages may choose more luxurious vacation options, such as flying to their destination and staying in five-star hotels or all-inclusive resorts.

Name-brand products are also considered normal goods, as consumers may choose to buy designer clothing, shoes, cosmetic items, and furniture when they have more money to spend.

What are Inferior Goods?

An inferior good is a type of economic good whose demand decreases as consumer income rises. As the economy improves and consumers have more money to spend, they tend to shift towards more expensive alternatives, causing a decrease in demand for inferior goods. This phenomenon is observed in economics where the demand for inferior goods is inversely related to income levels. This change in consumer behavior may be due to quality or a change in social status.

In contrast to normal goods, which have a positive income elasticity of demand, inferior goods are those that consumers demand less of as their income increases. Typically associated with lower socio-economic classes, inferior goods become more attractive to consumers as their income decreases or the economy contracts since they offer a more affordable alternative to more expensive goods. The term "inferior good" emphasizes affordability, rather than quality, although some inferior goods may be of lower quality.

Inferior goods are commodities that move in the opposite direction of the consumer's income. As a consumer's income increases, the demand for inferior goods decreases, and as income decreases, the demand for inferior goods increases. Examples of inferior goods include low-quality food items such as cereals.

A commodity can be considered normal for a consumer at some income levels, but inferior at other income levels. At very low levels of income, a consumer's demand for low-quality cereals may increase. However, as income increases beyond a certain point, the consumer is likely to decrease their consumption of such goods and switch to higher-quality cereals.

Consumer Behavior

Consumer behavior often determines the demand for inferior goods, which typically decreases as people's incomes rise or the economy improves. However, some consumers may continue to purchase inferior goods, regardless of their income or the state of the economy, simply because of personal preference.

For instance, even if someone's income increases, they may still prefer McDonald's coffee over Starbucks coffee, or they may continue to buy a cheaper, no-name grocery brand instead of the more expensive name-brand option.

It is important to note that inferior goods can vary depending on the location and cultural differences. For instance, fast food may be considered an inferior good in the United States, but it may be a normal good for people in developing countries.

Normal goods have a positive income elasticity of demand, meaning that their demand increases as people's incomes rise, while inferior goods have a negative income elasticity of demand.

Examples of Inferior Goods

Inferior goods are products whose demand decreases when people's incomes rise. Examples of these goods can be seen in everyday life, such as instant noodles, hamburgers, canned goods, and frozen dinners. These goods are typically cheaper and are often replaced by more expensive options as people's incomes increase.

Food is a necessity that is always purchased, and consumers may opt for inferior products like canned meat or frozen food over higher-quality options like steak when their incomes are low. Similarly, people may choose to eat at home instead of dining out at fancier restaurants, which can be considered a superior substitute.

Transportation is another example of an inferior good. When incomes are low, people may use public transport, but they may switch to taxis or cars as their incomes rise. Even within the car market, used cars may be considered inferior to new, more expensive models.

Brands can also be classified as inferior goods. For example, McDonald's coffee may be an inferior good compared to Starbucks coffee, as people may switch to the more affordable option when their incomes are low. Conversely, they may switch back to Starbucks coffee when their incomes increase.

Generic grocery store brands can also be classified as inferior goods. Consumers may opt for these cheaper products when their incomes are low but switch to more expensive name-brand products when their incomes increase. However, it's important to note that inferior goods are not necessarily of lower quality, and many generic brand products come from the same product line as name-brand goods.

Main Differences Between Normal and Inferior Goods (In Points)

An increase in consumer income levels leads to a rise in the demand for normal goods and a decrease in the demand for inferior goods. Consumers may choose normal goods over inferior goods when prices are low but may shift to inferior goods when prices rise.

Normal goods comprise items such as name-brand products and personal vehicles, whereas inferior goods can include canned foods and public transit options.

In contrast to normal goods, inferior goods are those whose demand decreases as consumers' incomes increase. While an economy is growing and wages are increasing, consumers usually shift to a more expensive substitute for inferior goods. The term "inferior" does not relate to quality but rather affordability.

Public transportation usually has an income elasticity of demand coefficient that is negative, indicating that its demand falls as income increases, thereby classifying it as an inferior good. Given a choice and the means to afford it, most people prefer to drive a car.

Inferior goods include all the goods and services that people buy only because they cannot afford better-quality substitutes.

As a consumer's income increases, their demand for normal goods typically increases, while their demand for inferior goods tends to decrease. This relationship is characterized by income elasticity, which is positive for normal goods and negative for inferior goods.

Normal goods exhibit a direct relationship between changes in income and the demand curve, while inferior goods exhibit an inverse relationship. Consumers may prefer normal goods when prices are low and inferior goods when prices are high.

Conclusion

To analyze the relationship between income and demand, consumer goods and services are typically classified into four categories: essential consumer goods, inferior goods, normal goods, and luxury goods. Normal goods are the opposite of inferior goods, as people tend to switch to normal goods when prices are low, but when prices rise, they may prefer to purchase inferior goods instead.

This shows a difference in customers' attitudes and buying patterns as well, as a result of their financial constraints.

Conclusively, the consumption of normal and inferior goods depends entirely on the purchasing power of intended consumers.

References

  • https://byjus.com/commerce/normal-and-inferior-goods/
  • https://www.investopedia.com/terms/i/inferior-good.asp 
  • https://www.indeed.com/career-advice/career-development/normal-vs-inferior-good
  • https://www.investopedia.com/terms/n/normal-good.asp

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