I got this yesterday in my email inbox from reader Tee:
I am taking an online Micro Economics class. I was just going over my PowerPoint slides and in chapter 3 they give examples of inferior goods. Some examples include public transportation and second hand furniture. My question is, in a world where people are now considering greener alternatives in order to save trees or to reduce their carbon footprint, would these goods still be considered inferior? Or is this a whole other topic that is covered in Economics later?
Hehe, I had no idea that I was the economics help desk to the world. I thought briefly whether I could turn this into some sort of viable business model, but my rumination just kept leading to the following visual:
Hm. I suppose the PayPal donate button on the right will have to be sufficient for now. Moving along to the question at hand…
Inferior goods, in economic terms, are goods where people want less of them as their incomes rise and vice versa. In this way, I think that public transportation and secondhand furniture are good examples, unless for some reason you’re talking about antique furniture that used to belong to Louis XIV or something. People, all else being equal, probably demand fewer of these items when they start making more money, or start demanding more of them if they see their incomes decrease. (I can give firsthand evidence with the latter point as it relates to public transportation, as I took 4 trains to get from Brooklyn back to Manhattan this weekend rather than take a taxi.) You can see a bit about inferior goods in my Determinants of Demand video here:
Most of the time we just talk qualitatively about whether a good is normal or inferior, but it’s sometimes helpful to be able to quantify this and say HOW responsive demand is to income. Economists do this with a measure called the income elasticity of demand. This measure asks the question “By what percent does demand change in response to a one percent change in income?” You can see a bit about income elasticity of demand here:
Mathematically speaking, inferior goods have negative income elasticities and normal goods have positive income elasticities. (Note that income elasticity of demand is different from price elasticity of demand.)
So now let’s think about public transporation and secondhand furniture in our increasingly eco-friendly world. I don’t have empirical evidence within easy reach right now, but I’ll try to make some reasonable predictions. As for public transportation, I find it difficult to imagine that people would consume more public transportation as they get richer, unless of course you think that they are switching over from walking or something, which has no out of pocket costs. Walking, however, is the most eco-friendly option, so it doesn’t make sense that people would switch from walking to public transportation based on environmental concerns. Therefore, it is my guess that environmental considerations make this good less inferior than it has been in the past, but still inferior. (”Inferior” wasn’t really meant to be a value judgment by economists, for the record.) In other words, people probably still purchase less public transportation as they get richer, but their behavior likely changes less than it used to because they now put a higher priority on doing what is good for the environment. In math terms, the income elasticity of demand gets less negative (closer to zero). I think that the secondhand furniture example follows the same pattern.
As a general rule of thumb, it’s helpful to remember that demand gets less responsive to income as income elasticity moves towards zero, regardless of whether you are talking about a normal or inferior good. For example, toilet paper probably has an income elasticity of close to zero, since I would like to think that people don’t change their toilet paper consumption habits based on income. (Or I would hope that all changes are along the quality rather than the quantity dimension.) And I’ve brought the conversation to a new low, so I will leave you with that.
![[Post to Twitter]](http://www.economistsdoitwithmodels.com/wp-content/plugins/tweet-this/icons/tt-twitter-big4.png){kind=icon}
![[Post to StumbleUpon]](http://www.economistsdoitwithmodels.com/wp-content/plugins/tweet-this/icons/tt-su-big4.png){kind=icon}
12 responses so far ↓
1 Stephen // Mar 15, 2010 at 9:52 pm
It doesn’t really affect your analysis, but I thought it was worth pointing out that walking isn’t necessarily the most eco-friendly option. Bicycling is generally more efficient; and depending on one’s weight, automobile, and marginal diet (what one eats to make up the extra burned calories), walking can be less eco-friendly than driving (assuming carbon is a good measure of eco-unfriendliness). There’s a page that discusses it here: http://bicycleuniverse.info/transpo/energy.html
2 Rod // Mar 15, 2010 at 10:28 pm
Er, when is a rule of thumb not general?
And, shouldn’t you adjust that five cents? It dates back — at least — to the early 1960s!
3 Viktor // Mar 16, 2010 at 7:23 am
I am not convinced that you are right. Because travel in general must be a superior good. Perhaps as expressed as share of travel public transport is inferior, but compared to never visiting your friends…
4 Andreas // Mar 16, 2010 at 8:07 am
What about other countries, like in Europe for example, where public transportation is more the norm, as compared to here in the US. Do they consider public transportation ‘inferior’ there too, or is it a local example for us only?
There are many people in cities, and in the countryside (in Europe) who do not have their own car, and rely only on public transportation. But that doesn’t mean they’re less well off, does it?
And what if you’re frugal - is public transportation still inferior?
5 Federico // Mar 16, 2010 at 3:13 pm
@Andreas
Ultimately, it is due to people’s preferences whether a good is inferior or not. If you have a rigid green conscience the car will be inferior w.r.t. the public transportation no matter the income you earn.
6 Tony // Mar 16, 2010 at 5:04 pm
A technical point related to the title (”Are inferior goods always inferior?”)
Starting from an income of zero, a good *has* to be normal in some range of incomes to *ever* be inferior. For consumption to decline as income increase, it had to have risen to some positive level at some lower income level.
For most people, going from monthly income of $0 to $1000 would lead to an increase in demand for public transportation. That is, for sufficiently low income levels, even public transportation is a normal good.
So, are inferior goods always inferior? No. For any inferior good, it must have been normal for a lower level of income.
7 Drew M // Mar 16, 2010 at 6:38 pm
There’s also always the argument of the environmental Kuznets curve. I’m not entirely sure how much this works for those examples (most studies seem to be undecided on the regularity that this phenomenon actually occurs throughout various countries). One could possibly make the argument that once you get to a certain level of income, one may be willing to pay a finder’s fee for finding nice, used furniture (because they don’t want to hurt the environment by purchasing a new one). (I realize this is a stretch)
8 brucecov // Mar 18, 2010 at 12:39 am
And of course, goods change state depending on one’s endowment:
the potato is a normal good for poor people, but becomes an inferior good at higher income levels, when the negative substitution effect dominates the income effect (and they switch to steak).
9 Federico // Mar 18, 2010 at 2:40 am
@Tony
Well, there are cases where a good is always inferior. Think of a vegan. Steak is always inferior w.r.t. tofu (of other meat substitutes). Even if the vegan became richer it would still consume tofu over meat. Certainly that’s not the case for the average Joe, however in my opinion you can definitely say that goods may be inferior for all levels of income.
10 Tony // Mar 18, 2010 at 8:53 am
@Frederico
Not true.
The example you just gave is actually not an “inferior good.” It is a “bad.” This is a common misconception about inferior goods, and it is a big reason why I brought the point up.
For something to be a “good,” it has to give you positive marginal utility if you get more of it. A “bad” gives negative marginal utility if you get more of it.
Thus, there are two components to the definition of inferior good.
(1) More is better.
(2) If income increases, the consumer buys less.
I agree that there are products that are “bads,” no matter how much money you have, but that’s a different story than a product being an “inferior good” for all levels of income (which isn’t possible).
For a concrete example of the difference, here are some examples of commodities in each type of category.
Bads: Pollution; Meat to a vegan; Labor
Inferior goods (possibly): Public transportation; Pabst Blue Ribbon beer; Ramen noodles
11 Matt // Mar 18, 2010 at 1:43 pm
http://www.youtube.com/watch?v=BWFW8m9Harw&feature=related
The doctor is in.
12 Federico // Mar 18, 2010 at 4:53 pm
@Tony
Yep, you’re right. I overlooked the marginal utility problem, my bad!
Leave a Comment