Inferior good

An inferior good is one the consumption of which falls as incomes rise: it has a negative income elasticity of demand. This contrasts with a normal good, the consumption of which increases as incomes rise. A rare and extreme type of inferior good, a Giffen good, is subject to such a strong income effect that consumption increases with higher prices.

This means that sales inferior goods are likely to be counter-cyclical, making the companies that produce them also counter-cyclical, or at least relatively resistant to economic cycles.

True inferior goods are not common, but particular goods and services may benefit from some customers who buy more as incomes fall, even though not all customers do. An example of this behaviour would be a chain of cheap pubs which gains customers during a recession as people switch from more expensive options for going out (offsetting revenues lost as other customers spend less). Analysts tend to refer to this behaviour as “trading down”.

Investors will rarely analyse demand in exactly these terms, but the principal that the relationship between incomes and consumption can be modelled, and may be negative is important.

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