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Inferior goods clarification

AP.MICRO:
MKT‑3 (EU)
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MKT‑3.B (LO)
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MKT‑3.B.1 (EK)
The concepts of normal goods and inferior goods can be tricky, and the definitions can be somewhat subjective as well. In this video, we take a deeper look at these kinds of goods. Created by Sal Khan.

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  • blobby green style avatar for user mweiss
    Is it possible for demand curves to shift and overlap one another or is it generally the case that this doesn't happen? If it does happen, how does this effect defining the transition between a normal and inferior good? Just curious in case Sal doesn't mention this in a later video that I haven't gotten to yet.
    (14 votes)
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    • male robot hal style avatar for user BrentWassell
      I would disagree. Just think of comparing the price vs quantity demanded for 2 different groups. If they are both linear, and if the have different slopes, then they will cross paths at some point meaning both groups will have the same quantity demanded at the same price.
      (12 votes)
  • blobby green style avatar for user unoriju
    With increase in income, the population that couldn't afford even the inferior good (cheapest of all three cars), will now start buying it. Wouldn't this counter any decline in demand for the inferior good?
    (7 votes)
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  • mr pants teal style avatar for user Spencer Holcomb
    What are some other examples of inferior goods besides cars?
    (3 votes)
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    • aqualine ultimate style avatar for user Stefan van der Waal
      Potatoes you'll still have to cut yourself. When incomes go up people start buying the ones that are already peeled and cut.
      Fans are inferior too. When people start earning more they'll probably start switching to an aircon.
      Pretty much everything bought in a discount store like Walmart is inferior. It's cheap, but it's also low quality.
      As a final example, if you'll have to travel over long distances the bus is an inferior service. Air or rail travel is faster and more convenient.
      (13 votes)
  • leaf green style avatar for user Evan Yates
    Does the cheap car HAVE to be the absolute cheapest product on the market for the demand to decrease as the income increases?
    (5 votes)
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    • leafers ultimate style avatar for user Yulian Dragoslavov
      Consider the Sedan ( middle car ) case. If there is a change in income so big that the chunk Rolls-Royce takes from the Sedan is bigger than the chunk the Sedan takes from the inferior good, than the Sedan becomes an inferior good itself. Inferior good is an economics term not a description of a perticular product. For something to be inferior it only needs to fit in the category of goods that are sold less when the income of the population rises.
      (6 votes)
  • leafers ultimate style avatar for user Navid
    Sal talked about "Inferior Goods" and "Normal Goods", are there "Superior Goods"?
    (5 votes)
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  • blobby green style avatar for user pakiesully616
    Is the term "inferior" based solely on price? Some products (eg cars) are cheap because they are mass produced but are a much better than a hand made car that is more expensive
    (5 votes)
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    • aqualine ultimate style avatar for user Nuzhah Tarsoo
      No, we talk of inferior in terms of what people would be more willing to buy if they had sufficient money(or appropriate income). Also, when we are talking of quantity demanded, we do not consider the price. The 'cheap' car might interest the general population instead of the hand made one which will be less worth buying. So, when there is a rise in income, there will be a greater rise in the 'cheap' car (for those who could not afford it previously) than the hand made car. Thus, the hand made car is seen as an inferior good in this context. I want to make that clear: when we talk of inferior or normal, we are considering the preferences of the population rather than price (though they are related in many cases). Hope that helps.
      (2 votes)
  • leaf green style avatar for user Tom Joyce
    How would you specify the differences between a normal good and a luxury good?
    (2 votes)
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    • mr pink red style avatar for user matt
      It's to do with income elasticity of demand. I think you might learn about this in a future lesson.

      Basically the strict way to define between these goods are that inferior goods have a YED (Income elasticity of demand) of < 0, Normal goods have a YED of > 0, and Luxury goods have a YED of > 1.

      Put simply it's to do with how volatile the change in demand is compared to the change in income. If incomes were becoming smaller (such as an economic downturn) the decrease in demand for luxury goods would be far greater than the decrease in demand for normal goods, Relative to the size of their original demands of course. The opposite is also true of course.
      (5 votes)
  • winston default style avatar for user kaitrav03
    Is it possible for the quantity of demand to go down when the price is dropped? For example, if someone's selling a car for 15$, it would seem suspicious, and few people would buy it. Right?
    (3 votes)
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    • male robot hal style avatar for user Andrew M
      yes that's possible but remember that the law of demand assumes ALL ELSE IS EQUAL
      So if people were buying the car when it cost $10000 we assume - in this model - that when it costs $15 they still have the same information about its quality and the same desire to own the car and the ONLY thing that is different is that the price went from $10000 to $15, so of course they would like to buy more of these cars at this price.
      But you are correct to observe that the law of demand may not always hold in real life, and that's an important aspect of learning economics, to realize that all models have assumptions and limitations that are important to understand before you draw any conclusions.
      (3 votes)
  • leaf green style avatar for user Fatema Hosseini
    I really appreciate of your efforts! These videos helped me a lot and I am really thankful.
    I wanted to ask that are there any practices/exercise for us to solve. I guess by solving problems, we would learn better.
    My suggestion is asking/having some critical questions at the end of each video would be a great chance for us, students, to think and post the answers here!
    (3 votes)
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    • ohnoes default style avatar for user Tejas
      Unfortunately, the economics playlist isn't meant to replace an actual course on the subject, just complement it by drawing the graphs and giving students the ability to visually see what is happening.
      (1 vote)
  • blobby green style avatar for user Nichole Alicia Haynes
    What about in the case of a giffen or a luxury good? how would they react to a change in income. Graphically.
    (2 votes)
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    • male robot hal style avatar for user Enn
      A Giffen good is an inferior good and hence its demand will increase with a decrease in the income, causing the demand curve to shift rightward and vice versa in case of an increase in income.
      The demand of a luxury good will increase with an increase in income while fall with a decrease in income. Hence the demand curve of a luxury good will shift rightward in case of an increase in income and leftward in case of a decrease in income.
      (3 votes)

Video transcript

I sensed some confusion coming out of the last video. And for your good, so I thought I would do another one. So let's make, let's assume that there's three cars in the market, and what I want to do with this is I sense that some people thought that I was suggesting that a car in general is an inferior good, and that's not what I was saying. I was saying, if we lived in a reality where everyone owned a car and a car was a necessity for life, and that is true in much of the developed world, I was saying that the cheapest car in the market might be considered an inferior good. And to think about that, let's just think about the entire population. So let's say this line, this line represents the entire population in our place, in our developed country, where everyone owns a car. And let's say, let's represent this car with a blue. So let's say maybe 1/3 of the people right now have that car. Now, let's say a good chunk of the people have this midsize sedan, this is probably the car that most people would like to have, it's a little bit safer, it's a little bit larger, it's a more powerful engine. And so this is where most people are sitting. And then you have this ultra, this kind of luxury, you have this luxury car, Rolls Royce maybe. And so that is a very small segment. So this end of the line is the poor, in our population. This is the rich right over here. So this is at some given income level, and maybe we could say this is true at a particular price point. But what we're going to talk about is the general impact on demand-- so on the entire curve at any given price point, always assuming that this is the most expensive, this is in between, and this is the least expensive. Now, what happens if income goes up from here? Well, the very poorest, they're not going to be able to necessarily just trade up to this midsize sedan yet, although they maybe have more income for other things or maybe they can get a nicer version of this. But for the most part, they're still going to be driving this car. But at kind of the boundary right over here, if the incomes do go up, there will be people who now could afford the mid-size car, and that's what they want. And so these people might start buying the midsize car. And then what will happen over here, well, maybe there's a few people at the boundary over here, they now have the money to afford this very expensive car, and it suits their tastes. And so they also, a very small proportion, also grows there. So what happened here? When income went up, the quantity demanded at a particular price point for this smallest car went down. But the demand for this midsize car went up, it took a much bigger chunk out of this blue than a chunk was taken out of it by the orange, and also the demand for this very expensive car went up. And that was at a particular price point, but assuming that this is the most expensive, this is the middle, and this is the cheapest expensive, this would be true of probably any price point. And so we have this phenomenon that when income went up, the quantity demanded at multiple price points for this car-- so let me draw its actual demand curve. So this car right over here, this is price, this over here is demand. If its old demand curve looked something like this, we're saying-- and maybe when we thought about this at first, we're thinking of the price point right over here, we notice when income went up, at that particular price point, the quantity demanded went down, and that'd be true pretty much any price point, assuming that this is always the cheapest car. So at any price point, you would have a decrease in demand. Remember, when we talk about a decrease in demand, we're talking about a shift of the entire curve, we're not talking about just one particular quantity. Now, there's another interesting question that was asked, and I think it was a very nice and subtle thing to think about. I keep drawing these shifting demand curves, and if at least I understand the question properly, the question is well, does the curve, when it shifts, does it necessarily shift perfectly or does sometimes it change? Does it shift more at one price point or another? And the simple answer is it can. In fact, in very few circumstances would it probably be a perfect shift. Depending on the price point you're at, it would probably shift a little bit different. So the actual shape of the curve might change while it's shifting. But anyway, going back to this, so we see this cheap car right here had the unusual property that when incomes went up, the demand curve shifted to the left. And that's why we call this an inferior good. These other two cars when-- so that's price, and this is demand-- these other two cars when income went up-- so if this was the demand curve at first-- when income went up, demand went up. The whole curve got shifted to the right, so they are normal. So these are normal goods.