What are Normal Goods? What are Inferior Goods? What are Substitutes and Complements of a Good and how their prices affect the quantity demanded for that good?
In previous sessions, we discussed that the Demand is
defined as the willingness as well as ability to buy a particular quantity of a
good, other factors being the same or unchanged. The willingness is decided by
the taste and preferences of the consumer and the ability or affordability is
decided by the income of the consumer. But one thing which is important to note
that here is that we are taking into consideration only the price of good as a
variable and we assume other factors like the taste and preferences and income
remains the same. But they do change.
So till now, we studied the relation between the quantity of
goods demanded by the consumer with price of that good as per given in the market.
But even other factors which play a role in deciding the demand for a good or
commodity changes with the time and hence it becomes important to study the
relation between other factors and the quantity of a good or commodity demanded
by the consumer.
Normal Goods and Inferior Goods
As discussed above, there is also a relation between income
of the consumer and the quantity of goods demanded by the consumer. Generally,
as the income of the consumer increases, the quantity of a good demanded by the
consumer can either increase or decrease, depending on what the good is i.e.,
depending on the nature and characteristics of that good.
Normally in case of most of the goods, as the income of a
consumer increases, the demand for those goods increases. Such type of goods
whose demand increases as the income of the consumer increases are called
Normal Goods.
Hence, relation between consumer’s demand for normal good
and the income of the consumer is positive meaning demand for the normal goods
moves in same direction as the income of the consumer. With increase in income,
consumer demands more quantity of those goods and vice versa.
On the other hand, there are few goods, whose demand is
negatively correlated with the income of the consumer. That is to say, as the income
of the consumer rises, the demand for such good falls and as the income of the
consumer decreases, the demand for such goods increases. Such goods are called
inferior goods. Inferior goods share negative relation with the income of the
consumer. As income of consumer increases, the demand for inferior goods
decreases and vice versa. For example, goods which are of lower quality and are
available for cheap would share negative correlation with the income of the
consumer because as income of the consumer increases above a certain level, the
consumer would switch to consume better quality even if they cost more and
hence the demand of the low quality goods would reduce with the increase in
income.
Nature of good for a consumer changes with time…
One thing important to note here is that for the same
consumer, the same good can be of different nature. If a poor consumer buys a
lower quality of good, and the income of the consumer rises minimal i.e., not
up to a level where the consumer can buy higher quality good, then the lower
quality good would still be considered a normal good for that consumer. Because
with slight increase in income, what the consumer will do would be slightly
increase consumption of that lower quality good. But for the same consumer, if
level of income increases to a large extent sufficient enough to change
lifestyle and standard of living, the consumer will switch the consumption of
lower quality of good with higher quality. At that point in time, the lower
quality of good will become inferior good for that same consumer which was
previously a normal good. Because now, with increase in the income the consumer
will reduce the consumption of poor quality of good, thus establishing negative
relationship.
Substitutes and Complements of a Good
We saw the relation between quantity of good demanded by the
consumer and price of that good. We also studied relation between quantity of
good demanded by the consumer and income of the consumer.
There is also a relationship between quantity of good
demanded by the consumer and price of other goods which is related to the
original good in question. Relation between two goods can be described in two
ways; either those goods are substitutes to each other or those goods are
complementary to each other. When any two goods have any of the above relation,
the price of one good affects the demand of the other good. So quantity of a
good demanded by a consumer will increase or decrease with change in price of
that good’s substitute good or complementary good.
Substitute goods are goods which can have similar utility to
the consumer and consumer can adjust switching between those two good if
required although exceptions prevail. For example, tea and coffee are
substitute goods. If the price of tea increases, the consumer can shift to
coffee which will result in increased demand for coffee. At the same time, if
price of coffee increases, the consumer can shift to tea which will result in
increased demand for tea. So in case of substitute goods, the demand for a good
is positively related to the price of its substitute good as they move in same
direction.
On the other hand, the goods which are consumed together are
called Complementary Goods. For example, tea and sugar are considered as
complementary goods as they are consumed together. Now change in price of one
affects the demand for the other good. Here, since tea and sugar are consumed
together they are complementary goods. If the price of the sugar increases, it
may lead to decrease in consumption or demand for tea, because as an ingredient
of tea, increases prices of sugar will result in prepared tea being costlier.
And at the same time, if the price of sugar decreases, it may lead to increase
in consumption or demand for tea, as cheaper sugar would result in decreasing
cost of prepared tea. So in case of complementary goods, the demand for a good
is negatively related to the price of its complementary good as they move in opposite
direction.
Conclusion
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