ECON: Normal and Inferior Goods

Good morning/evening/night readers!

So far, in our Economics course, we investigated the Demand, which is a variation of price and quantity demanded. So we saw the Law of Demand: inverse correlation between them (when the price rises, the quantity demanded will decrease). Also, we examined the factors that likely affect demand; let´s recap this!

The factors that probably rise the demand are increasing of income, population, price of competitive goods, the expectation of future prices, and credit. On the other hand, the factors that probably decrease the demand are diminishing the price of the own good and of the complementary goods. Notice that vice-versa works too and there are numerous others, but these are the most important.

You may observe that I wrote: factors LIKELY and PROBABLY affect the demand. Hence, there are exceptions that we are going to analyze now. But first, we need to distinguish between normal and inferior goods.

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What are normal and inferior goods?

Inferior goods are which the quantity demanded decreases when the consumer income rises; they tend to be the cheapest option and at the end of life. Conversely, normal goods are which the quantity demanded increases when the consumer income rise; they tend to be the actual products. Thus, in developed countries, the demand for normal goods increases, and for inferior goods decreases over time.

For instance, imagine two cellphones:

1) Cheaper cellphone which costs $18.18 USD

2) More expensive cellphone which costs $699.00 USD

They certainly have a huge disparity in price! However, both have similar functionalities: call and send messages; so we can infer some things

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1) The cheaper is an inferior good because we can deduce that if the income rises, people could buy better cellphones, and the demand for it will decrease as represented in the graph below.

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2) The more expensive is a normal good because we can deduce that if the income rises, more people would apparently buy this cellphone, and the demand for it will increase as represented in the graph below.

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Then, we can merge these graphics into one relation below.

In the diagram above, the common state is in black (when there is not a variety in income). But when the income rises, the demand for normal good (blue) rises (you can see that it exceeds the limit of the normal state), and for inferior good (red) decreases (lose part of demand).

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Therefore, we noticed that there are exceptions in the variation between demand and consumer income. Then, we defined normal goods (when the income rises, the quantity demanded too) and inferior goods (when the income rises, the quantity demanded decreases). 

Perhaps, we will start to discuss supply in the next posts!

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Luigi