What is the difference between a normal good and an inferior good? Give an example of each.
The correct answer and explanation is:
A normal good is a type of good whose demand increases as consumer income rises, and conversely, demand decreases when consumer income falls. This relationship occurs because people tend to buy more of these goods when they have more disposable income. An example of a normal good is organic food. As people earn more money, they are more likely to purchase higher-quality, organic food items, which tend to be more expensive than non-organic alternatives.
On the other hand, an inferior good is a type of good whose demand decreases as consumer income increases. When income rises, consumers tend to shift to higher-quality substitutes, reducing their demand for inferior goods. Conversely, when income decreases, demand for inferior goods tends to increase. This is because they are often cheaper alternatives to other goods. A classic example of an inferior good is instant noodles. During economic downturns or when individuals face budget constraints, people often turn to cheaper food options like instant noodles instead of more expensive, healthier meals.
The distinction between normal and inferior goods is important in understanding consumer behavior and market trends. In the case of normal goods, businesses may focus on premium products or expanding the availability of their goods in markets with higher average incomes. In contrast, inferior goods tend to be associated with cost-cutting strategies or price-sensitive markets. For businesses, understanding which category their products fall into allows them to adapt their marketing and pricing strategies based on changes in consumer income levels.