http://en.wikipedia.org/wiki/Inferior_goods
I was wondering if there was any writings explaining this phenomenom of demand increasing for a good as a function of income falling. The idea doesn't sit right with me, but I cannot quite find the fault.
My first idea was just that you can't buy parts of a unit, so really it is just a prior [richer] situation staying constant but you are forced to change your expression of it. You might prefer, say, a steak over two hamburgers, but when your income falls to the point where you can't afford to purchase the whole steak, you buy two hamburgers instead. But, would this be considered an increase in demand because you actually choose to purchase the hamburgers, or would it just be a manifestation of an earlier, latent demand that wasn't expressed because you chose a substitute good?
I guess the basic question would be: can you have demand for a good without expressing it in trade? That is, if you choose to buy a substitute, does that mean your demand for the good it replaces is zero at that price? Or demand exist even if it isn't expressed?
The Wikipedia definition certainly suggests that the demand falls for the "inferior" good because it rises for the "superior" alternative. It is reasonable to observe whether demand correlates with income, and it wouldn't be too shocking to see that demand for Busch correlates negatively with income, and demand for Czechvar correlates positively.
You're right, though, that there's no such thing as undemonstrated preference. We can say that the one drinking the Czechvar preferred it to Busch, and vice versa, but that's all we can say. We can't say what anyone's second choice would be, for example. So it's a methodological error to say that, because fewer rich people prefer Busch, therefore more rich people unprefer Busch. Nor would it be right to imagine one person moving up the income scale and abandoning Busch for Czechvar, since preferences are always time dependent, individual and subjective.
Psychologically, though, we could discover that a certain rich man used to drink Busch, and stopped when he became rich. So it's understandable why people fall for the temptation of interpreting "inferior goods" in psychological terms. That's invalid from an Austrian viewpoint, but I think mainstream economists do that sort of thing all the time.
--Len
I think the inferior/normal good concept makes sense. If you are poor your demand of top ramen is high. If your income increases your demand starts to increase with steak. Makes sense to me.
The demand is always there. I think when a demand is latent (i.e. hidden), it can manifest in other ways which are observable, suggesting the existence of a latent demand.
For example, in a society, males prefer attractice girls (superior goods) over not-so-attrative, or even ugly girls (inferior goods). But pretty girls are only a small portion, so in a monogamous society, they are married to an equal number of males. Thus, most males end up marrying females which they do not think are ideal, but the demand for pretty girls (superior girls) are STILL THERE, they just have to settle with inferior goods, they don't have a choice.
Now the question is, how do we know there is a demand for the superior goods (pretty girls), via economical way? Simple. Look at economic behaviors in the society. "Sex sells" technique is a common commercial practice, suggesting that males in general tend to prefer to interact with pretty girls than ugly ones, revealing a preferece of superior goods over inferior ones.
Another good example is pornography. Males with inferior goods as their wives or girlfriends, still seek porn, satisfying themselves with the images of superior goods. Prostitution is another example.
I mean, it's everywhere. Do you know that most crab-meat are not even made of crab, but of cheaper, fish-paste instead, manufactured to make them look and taste like crab? They are inferior to real crab meat but still popular. If there is no latent demand for crab meat, these fake crab-meat would not be so popular!
Elf,
Demand in economics means, by definition "I want it AND have the money to pay for it". Which invalidates most of your post.
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It's easy to refute an argument if you first misrepresent it. William Keizer
I don't quite understand what you mean by this example. Let's use the top ramen market as an example. Conventially, an increase in income shifts the demand curve to the right (or increases). So, if an individual has a pay increase from $20,000 a year to $100,000 a year his demand for top ramen should increase a whole lot. However, because top ramen is an inferior good it has the opposite effect and we all know why that is. Now the opposite scenario, say a person who makes $100,000 a year gets demoted to an occupation that pays him $20,000 a year. Usually, his demand for things will shift to the left (decrease) and this will be true for things like jewelery, eating out, cars, etc. However, his demand for top ramen would increase.
Smiling Dave: Elf, Demand in economics means, by definition "I want it AND have the money to pay for it". Which invalidates most of your post.
http://www.youtube.com/watch?v=1ytCEuuW2_A
EmbraceLiberty:Let's use the top ramen market as an example. Conventially, an increase in income shifts the demand curve to the right (or increases). So, if an individual has a pay increase from $20,000 a year to $100,000 a year his demand for top ramen should increase a whole lot. However, because top ramen is an inferior good it has the opposite effect and we all know why that is.
I don't. As my income rose I bought more top ramen. Evidently I disprove your entire economic law. Sorry.
Of course, there are some exceptions of the rule. There is always that millionaire who still takes the bus despite his ability to buy a car because of his preference, but again this is exception. That is why you don't see many Ross, Dollar Tree and 99 cent stores in wealthy neighborhoods.
Oh so you mean the good isn't really "inferior"? That preferences are always time dependent, individual and subjective? Ya don't say.
EmbraceLiberty:That is why you don't see many Ross, Dollar Tree and 99 cent stores in wealthy neighborhoods.
Doesn't this have more to do with entrepreneurial planning and zoning laws than with income elasticity?
If I had a cake and ate it, it can be concluded that I do not have it anymore. HHH
I don't think anyone is stating a 'law' here. It seems perfectly reasonable that if a person's income goes up, or the price of a product they see as inferior goes down, they might consume less of that good because substitutes are now more affordable. I can't see the problem with the idea at all.
Consumariat:It seems perfectly reasonable that if a person's income goes up, or the price of a product they see as inferior goes down, they might consume less of that good because substitutes are now more affordable.
There's your difference right there.
Difference with what? Are there people that claim the concept of an inferior/Giffen good is inherent in the good itself and not in the preferences of consumers?
Did you read the first two posts in this thread?
Yes, but I don't see how any of that is incompatible with the idea of demand being subjective.
Economic goods are not inherently "inferior" or "superior". Those are subjective qualities which we impute to them.
The keyboard is mightier than the gun.
Non parit potestas ipsius auctoritatem.
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But noone claims that they are inherently inferior. The term is used simply to describe a situation in which a person chooses to consume less of a good when it gets cheaper.
EmbraceLiberty appeared to be claiming that very thing - which is why John James responded the way he did.
But why does the entreprenuer not build these in wealthier communities? Because there is less demand (even though the neighborhood has more money), nobody would go there, so he will build a jewelery store instead.
I was assuming you would understand why it was an inferior good. Of course, goods aren't inherently inferior or normal.
EmbraceLiberty:But why does the entreprenuer not build these in wealthier communities?
EmbraceLiberty:Because there is less demand (even though the neighborhood has more money), nobody would go there, so he will build a jewelery store instead.
There's seems to be many confusions here. Consumeriat, you misunderstand the definition of inferior good. Any good(or service) for which the demand for it decreases as consumer INCOME increases is an inferior good (i.e. frozen/canned foods, tortillas, tacos, public transit). Equivalently, any good for which there is negative income elasticity of demand is inferior.
ThatOldGuy,
Do you think THE demand for Top Ramen is solely determined by JJ's demand for it?
Should I?
There really is no reason to continue this discussion. The evidence of this concept is best revealed at simpy examining the diets of people in poverty and wealthy people. Sure, there will be that millionaire who only eats McDonalds and top ramen, but the majority of people wouldn't.
" Consumeriat, you misunderstand the definition of inferior good. Any good(or service) for which the demand for it decreases as consumer INCOME increases is an inferior good (i.e. frozen/canned foods, tortillas, tacos, public transit). Equivalently, any good for which there is negative income elasticity of demand is inferior."
Isn't that what I said?
Do you understand the difference between change in demand vs change in quantity demanded?
Is this relevant to any point you or I have made?
The question was directed toward Consumeriat.
Mea culpa.
Yes