8.6 Inferior goods

There are also goods for which an increase in income leads to less consumption of this good. Such goods are called inferior goods and this case is shown in the graph above. Let us now assume that Good 1 is an inferior good and Good 2 s a normal good. The preferences of the household are again given by the location and shape of the indifference curves. What happens if we now increase the income of the household? The increase in income shifts the budget line outwards and the consumer chooses a new optimum where the highest possible indifference curve is tangent to the budget line. However, as we can see from the orange arrows, in the new optimum more of Good 2 , but less of Good 1 is consumed. As already mentioned, this is due to the shape and position of the indifference curves. Because in this case, they represent the order of preference under the assumption that Good 1 is an inferior good. An increase in income thus leads to a decline in consumption of Good 1 . In reality, most goods are normal goods, but the case of inferior goods is not as rare as it may seem at first glance. Examples of this are: margarine, which is often replaced by butter when income rises and is therefore consumed less; or bus rides, which are no longer necessary if you can afford a car. Thus, inferior goods are replaced by higher quality ones. Analogously, in the case of a decline in income: if the income falls, more of Good 1 is consumed again.

(c) by Christian Bauer
Prof. Dr. Christian Bauer
Chair of monetary economics
Trier University
D-54296 Trier
Tel.: +49 (0)651/201-2743
E-mail: Bauer@uni-trier.de
URL: https://www.cbauer.de