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.