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Types of Goods

Types of Goods

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Author: Sophia Tutorial
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Differentiate between normal, luxury, inferior, Giffenm, and Veblen goods.

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Tutorial
what's covered
This tutorial will cover the different types of goods, including normal, luxury, inferior, Giffen, and Veblen goods.

Our discussion breaks down as follows:

  1. Normal Goods
  2. Inferior Goods
  3. Giffen and Veblen Goods


1. Normal Goods

The first type of good to discuss comprise normal goods, a category which includes most goods. Normal goods are goods for which demand increases as income increases. As we make more money, we generally buy more of most things.

brainstorm
Suppose you got a large pay raise. What would you buy more of, if you made more money?

Luxury goods are a type of normal good that offers better quality and features, which is consumed when income rises.

Therefore, when our income goes up, we buy more luxury goods.

EXAMPLE

For example, luxury goods could include expensive restaurant meals, yachts, fur coats or designer jeans.

terms to know
Normal Goods
Goods for which demand increases as income increases
Luxury Goods
A good that offers better quality and features which is consumed when income rises


2. Inferior Goods

On the opposite end of the spectrum are the type of goods known as inferior goods, or goods for which demand decreases as income increases.

brainstorm
Can you think of anything you would buy less of if you made more money? On the contrary, can you think of anything you'd buy more of if you made less money?

EXAMPLE

For instance, if you lost your job, you might have to buy more generic brands. In this case, the generic brands would be considered an inferior good, because you would buy store brand cereal instead of a name brand if you made less money.

think about it
During a past recession, grocery stores actually did quite well. Why do you think that would be? Well, it's not because grocery stores are inferior. However, if you think about it, people likely went out to dinner less often if they were making less money during the recession. Instead, they had to go grocery shopping to substitute for going out to eat. In this instance, grocery shopping would be categorized as an inferior good.

Here is a summary sheet.

Summary Sheet

As income goes up, demand for normal goods--most goods--goes up, including luxury goods.

As income increases, however, the demand for an inferior good falls, meaning, for instance, we buy less Spam if we make more money, because we can afford "real" meat.

term to know
Inferior Goods
Goods for which demand decreases as income increases


3. Giffen and Veblen Goods

Now let's discuss two types of goods that are less common.

The first one is called a Giffen good, which is a good for which the demand increases with price and falls as price decreases.

Giffen goods are a type of inferior good that arise because there are no close substitutes for the good itself. Economists debate how common these goods are.

EXAMPLE

An example of a Giffen good is a cheap, stable food in an economy, such as rice in China. If the price of rice in China goes up, the poor will still buy it and may actually buy more since it will still be cheaper than more expensive food items.

Now, a Veblen good involves the concept of conspicuous consumption. These are goods for which consumption increases as income increases because consumers wish to establish stature and prestige.

people to know
Thorstein Veblen, shown below, coined the term conspicuous consumption. He observed that people will purchase these types of goods--named Veblen goods after him--just to show their economic power or status.
Thorstein Veblen

In fact, people are more likely to buy Veblen goods as they get more expensive, simply to show their wealth.

EXAMPLE

Examples of Veblen goods include items like designer purses or expensive cars.

Here is a summary sheet illustrating the difference between Giffen and Veblen goods.

Summary Sheet

As the price of goods increases, consumption of most goods falls.

However, as the price of goods increases, consumption of Giffen and Veblen goods increases, though for varying reasons.

With Giffen goods, such as bread, consumers buy it because they don't have a choice; there is no substitute for it and it is still cheaper than other items.

With Veblen goods, certain consumers want to show how wealthy they are, so they purchase that Rolls Royce even though it is ridiculously expensive.

terms to know
Giffen Goods
A good for which the demand increases with price and falls as price decreases
Veblen Goods (Conspicuous Consumption)
Goods for which consumption increases as income increases because consumers wish to establish stature and prestige


summary
Today we learned about the difference between normal goods, inferior goods, and luxury goods. We also learned about Veblen and Giffen goods, which are interesting because people actually buy more of them as their price increases, though for very different reasons.

Source: Adapted from Sophia instructor Kate Eskra.

Terms to Know
Giffen Goods

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

Inferior Goods

Goods for which demand decreases as income increases.

Luxury Goods

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

Normal Goods

Goods for which demand increases as income increases.

Veblen Goods (conspicuous consumption)

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