Law of Demand and Inferior Goods

Law of demand states that the quantity demanded of a product decreases as its price increases, given that all other factors remain constant. However, this law fails to hold true in case of inferior goods when the income effect is greater than the substitution effect.

What are inferior goods?

Inferior goods are those products whose demand decreases with an increase in income. These goods are often considered as low-quality or low-priced alternatives to other goods. Examples of inferior goods include low-quality food products, used cars, and cheap clothing.

Income effect vs. Substitution effect

The income effect refers to the change in the quantity demanded of a product due to a change in consumer income. When a consumer's income increases, they have more purchasing power, and they may choose to purchase higher-quality goods. As a result, the demand for inferior goods decreases.

The substitution effect, on the other hand, refers to the change in the quantity demanded of a product due to a change in its price. When the price of a product increases, consumers may switch to cheaper substitutes, and the demand for the product decreases.

Failure of law of demand in case of inferior goods

In the case of inferior goods, the income effect can be stronger than the substitution effect, leading to an increase in demand when the price of the product increases. This is because an increase in price may be interpreted as an increase in quality by some consumers. As their income also increases, they may continue to purchase the inferior good.

Conclusion

In conclusion, the law of demand does not hold true in case of inferior goods when the income effect is greater than the substitution effect. The demand for inferior goods may increase even when their price increases due to their low quality and low price.

Laws of demand fail in context of inferior goods because when our income reduces one cannot afford normal goods and shifts to inferior goods. lower the income more is the demand for inferior goods and vice versa.