Income Effect For Inferior Goods

An inferior good is one whose demand drops when people s incomes rise.

Income effect for inferior goods. In case of an inferior goods also called giffen good the income effect and substitution effect work in opposite directions i e. People use inferior goods when they are unable to afford normal goods or expensive goods. This is termed as an income effect. It can be stated that an increase in income will lead a consumer to find its equilibrium on a higher indifference curve and vice versa product prices remaining the same.

The net effect equal the difference between substitution effect and income effect. Its demand increases with decrease in income and vice versa. Substitution and income effects for an inferior good. It is because an inferior good reacts differently to a change in income.

Therefore consumption of inferior goods by a person decreases if income increases above a certain level. When incomes are low or the economy contracts inferior goods become a more affordable substitute for a more expensive good.