Inferior goods
Anyone who has taken a course in economics knows about the theory of normal and inferior goods. For those new to this theory, here is how it works. People tend to be drawn to consuming higher quality items in times of economic prosperity. Consumers have an abundance of money, and therefore have more money to spend on higher quality items. These items are known as normal goods. In times of economic recession, consumers shift their spending habits towards more cheaply priced items in order to save money. These cheaper items are called inferior goods.
Food can be used as a great example to show the difference between normal and inferior goods. Suppose a person has a good job and are making a lot of money. They could buy normal goods like steak and seafood for dinner every night because they have the means to do so. Suddenly the economy takes a turn for the worse and they get laid off and are forced to take a minimum wage job to make ends meet for the time being. With a lower income they won’t have as much money to spend on normal goods such as steak and seafood. In order to conserve money they will switch to eating inferior goods like hamburger meat and hot dogs.
In the economy, companies that produce normal goods like steak and seafood will see their revenues decrease because less and less people can afford to purchase them. Companies that produce inferior goods like hamburger meat and hot dogs will see their revenues increase because now more people are forced to buy these products.
In times of recession, like we are currently reported to be heading into, companies producing inferior goods can stand to prosper from this economic environment. In honor of this current economic downturn, I am going to be reviewing some companies over the next few months that are generally considered to be producers of inferior goods. These companies could stand to gain in value while the rest of the market is dropping.
Recent Comments