INFERIOR GOODS

July 2016, Paper-II
Question
In consumption, inferior goods have
a) Negative income effect
b) Positive income effect
c) Zero income effect
d) Infinite income effect
Answer A
An inferior good is a type of good whose demand declines when income rises. In other words, the demand for inferior goods is inversely related to the income of the consumer. In the case of inferior goods, the income effect will work in the opposite direction to the substitution effect. The income effect is the change in demand for a good or service caused by a change in a consumer’s
purchasing power resulting from a change in real income. This change can be the result of a rise in wages etc., or because existing income is freed up by a decrease or increase in the price of a good that money is being spent on. When the price of an inferior good falls, its negative income effect will tend to reduce the quantity purchased.