Monday, December 8, 2008
The Quintessential Inferior Good
As noted in this prior post about Wal-Mart, an inferior good is one whose income elasticity of demand is negative, so that when income goes down, demand goes up. Sales of another inferior good, Spam, are also on the rise with the recent economic difficulties. Sales have increased over ten percent in the most recent three months, and the manufacturer (Hormel) has instituted double shifts at its production facility.
For those of you not familiar with the product, Spam "is made of just a few simple ingredients. Ham, pork, sugar, salt, water, a little potato starch, and a mere hint of sodium nitrite to help SPAM® keep its color. Sounds delicious, and it is."
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This stuff is great fried.ReplyDelete
We, as humans, all have our biases in regards to things that permeate our world. I detest heavy metal music but my sister loves it. This is no different for how some people feel in regards to inferior vs “normal” products. Inferior goods are products that demand decreases when individual’s income rises. Or more formally defined by Business Dictionary as “a product whose income elasticity of demand is less than zero. As the consumers become monetarily better off (earn higher incomes), the demand for such goods (such as basic food) falls because consumers can now afford higher priced substitutes (Business Dictionary). In contrast, a normal good is a product whose demand increases when individual’s income increases; or “a good for which demand (consumption) increases as consumer income rises, but at a rate slower than the rate of increase in income. Defined also as a good for which the income elasticity of demand is positive but less than one. Also called necessary good, it is the opposite of inferior good” (Business Dictionary). To break it down in layman’s terms in regards to inferior goods, say you currently shop on the regular at Walmart and frequently purchase their store brands such as Faded Glory and Equate (these would be inferior products). But then you hit the lottery and decide you can afford better and buy your beauty product and clothing at Macy’s (these would be the normal products).ReplyDelete
What may surprise you is that inferior good’s market price does have an effect on marginal revenue of a firm. Even a small shift of the product’s market price can result in a drastic change of the demanded quantity and, hence, the revenues of a firm (Macjejowska, Jedrzejewski, Pyzalska and Weron). One example of the relationship between inferior / normal products and economy is in Germany and the debate in regards to beer and other domestics. Per capita in Germany alcohol consumption has fallen by more than 25% over the last 30 years, Germany still finds itself among the world’s Top 4 countries in per capita beer consumption (Volland). This lead to many a German liquor factories shutting down and businesses closing, affecting their marginal revenue.
And to further complicate things, you need to make sure you don’t confuse Giffen good with “regular” inferior goods. These are products whose demand increases as price increases. In addition, “when the prices of these staples go down, the consumer would, out of the consumer's surplus (the price he has always paid and is ready to pay for the good minus the decreased price) difference that has occurred due to the price plunge, prefer to buy less of the staples and more of superior substitutes for consumption” (Buzzle). Many economics view Giffen goods are the black sheep of the economic world, seeing that it goes against the Laws of Demand. One of the most popular examples of Giffen goods is the Great Famine and Ireland’s potato consumption. Potatoes was a major crop in Ireland that the country depended on either due to economic or social reasons. When crops were ravaged with potato blight, demand increased AND price increased, even though it was an inferior product.
Maciejowska, K., Jędrzejewski, A., Kowalska-Pyzalska, A., & Weron, R. (2016). Impact of Social Interactions on Demand Curves for Innovative Products. Acta Physica Polonica A, 129(5), 1045-1049. doi:10.12693/aphyspola.129.1045
Volland, B. (2013). The History of an Inferior Good: Beer Consumption in Germany [Paper]. Philipps University Marburg, Department of Geography.