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Types of Goods

Types of Goods

Author: Kate Eskra
Description:

This lesson will explain the economic perspective on types of goods.

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Tutorial

TYPES OF GOODS

Source: Image of Thorstein Veblen, public domain, http://en.wikipedia.org/wiki/File:Veblen3a.jpg

Video Transcription

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Hi. Welcome to Economics. This is Kate. The title of this tutorial is Types Of Goods. As always, my key terms are in red and my examples are in green.

So in this tutorial will really just be looking at the different types of goods which are normal, inferior, giffen, luxury and veblen goods.

First of all, let's start with normal goods. Normal goods are most goods. They're goods for which demand increases as our income increases. Like I said, most goods are normal. As we make more money we generally buy more of most things. So what would you buy more of if you made more money? I know for myself if I got a large pay raise I would buy more shoes. I'm kind of a shoe fanatic. But I don't always have the money to buy all shoes that I would like.

Luxury goods are a type of normal good. They're a good that offers better quality and which is consumed when income rises. So again, when our income goes up we buy more of them. These could be things like really expensive restaurant meals, yachts, fur coats or designer jeans.

On the opposite end of the spectrum, though, we have the things called inferior goods. And these are goods for which demand decreases as our incomes increase. So, hm, can you think of anything you would buy less of if you made more money? Or on the contrary, can you think of anything you'd buy more of if you made less money?

Well, here's my examples, so if I lost my job, I was thinking that I would probably have to buy more generic brands. So the generic brands would be considered an inferior good, because we would buy store brand cereal instead of a name brand if we made less money.

So I have a little question for you here. I read an article that during this past recession grocery stores actually did do quite well. Why do you think that would be? It's not that grocery stores are inferior. But if you think about it, people probably went out to dinner less often if they were making little bit less money during the recession. So instead they had to go grocery shopping just as much, if not more, to substitute for going out to eat. In that case, grocery shopping would be categorized here is an inferior good.

Here's a summary sheet for you. As our income goes up, demand for normal goods, most goods, goes up. And that would include luxury goods. So if we make more money we go on vacation, we go out to dinner more often. As income increases the demand for an inferior good though falls. I put an example here, we buy less spam if we make more money because we can afford real meat.

Now let's get into two situations that are a little bit less common. The first one is called a giffen good. A giffen good is a good for which the demand increases with price and falls as price decreases. Hm.

Well, these are a type of inferior good. And really they come about because there are no close substitutes for the good itself. And economists really do debate on how common these are. But one of the places that we've definitely found them is-- the closest example would be a cheap, staple food in an economy. So I was trying to think of one and I came up with rice in China.

If the price of rice in China would go up, especially, the poor would still buy it. And, actually, might buy more of it even if the price went up because it's still going to be cheaper than more expensive food items. So that would be considered a giffen good.

A veblen good deals with a concept of conspicuous consumption which I'll talk about on the next slide. These are goods for which consumption increases as income increases because consumers which to establish stature and prestige.

This guy right here, Thorstein Veblen, coined the term, conspicuous consumption and he noticed that people will purchase these types of goods just to show their economic power or their economic status. And in fact, it's kind of ridiculous but people, sometimes, are more likely to buy them as they get more expensive just again to show how rich they are. So the examples that I could think of are things like designer purses or really, really, really expensive cars. Maybe really high end wine or something like that. I mean, I hope that I have never purchased something just because it's expensive. But apparently some people do.

Here is a summary sheet for you, again, of the difference between giffen and veblen goods. So I want you to keep in mind, as the price of goods increases-- here we're not talking about our income changing we're talking about the price of the good itself. I want you to keep in mind that consumption of most goods-- this is the overwhelming category here of what happens as prices go up consumption of most goods falls.

I gave you the example, we buy fewer of Granny Smith's apples when they raise the price. But those last two that we talked about, giffen and veblen goods. People actually buy more of them as their price goes up but for different reasons. Giffen, we don't have a choice so we buy bread when the price increases because there's no substitute for it and it still cheaper than other things.

But veblen, when the price goes up, we want to show how super-rich we are so we buy that Rolls Royce. even though it's ridiculously expensive.

What did you learn in this tutorial? We talked about the difference between normal, inferior and luxury goods. And then we looked as veblen and giffen goods which are more interesting because people buy more of them as their price goes up. But again, for very different reasons.

Thanks for listening. Have a great day.

Notes on "Types of Goods"

Terms to Know

Normal Goods

Goods for which demand increases as income increases.

Inferior Goods

Goods for which demand decreases as income increases.

Veblen Goods (conspicuous consumption)

Goods for which consumption increases as income increases because consumers wish to establish stature and prestige.

Giffen Goods

A good for which the demand increases with price and falls as price decreases.

Luxury Goods

A good that offers better quality and features which is consumed when income rises.