Types of goods

2007-09-22

in Economics, Geek stuff, Politics

In economic theory, most things you can buy are ‘normal goods.’ This means that, as the price rises, people buy less of them. Conversely, people buy more as the price falls. This is all quite self-explanatory but it is interesting to note that there are other types of goods that operate in different ways.

The most common example may be inferior goods. The richer people get, the less they spend on inferior goods. This includes most kinds of discount items: once people can afford something better, they make the switch. Inferior goods reflect this property both at the micro level (an individual gets a big raise and buys less cheap IKEA furniture) and at a macro level (the mean income in a state rises and demand for low-cost gruel falls). Long distance bus trips are a classic example of an inferior good, as anyone who has spent more than twelve hours in a smelly, noisy coach can easily understand.

A somewhat perverse counterpoint to inferior goods can be found in Veblen goods. Named after the economist Thorstein Veblen, these are products for which the demand actually rises as the price does. This is essentially on account of their exclusivity. People buy Velben goods (such as Rolls Royce cars and $50,000 cell phones) precisely to demonstrate that they can. Of course, this makes them a godsend for those hoping to part status conscious rich suckers from some of their wealth.

A final possibility, which may not actually exist, is a Giffen good. To qualify, the good needs to be inferior (in the sense described above), there must be a lack of close substitutes, and the good must comprise a significant share of the purchaser’s budget. With these goods, price rises also lead to people buying more, though for a rather different reason. People who have become too poor to buy a better option fall back on a worse option. The failure of economists to find any well-defended empirical examples suggests that this kind of good may exist only in the minds of academics.

Both Giffen goods and Veblen goods exist because of possible characteristics of the buyer, rather than of the good itself. Whereas Giffen goods are easy to reconcile with ‘rationality’ as understood by economists, Velben goods do so only when they are viewed as inputs in the manufacture of the commodity actually sought: such as social status or prestige.

People wanting to read even more about goods and economic theory can look into the distinction between rivalrous and non-rivalrous goods and excludable and non-excludable goods. The two ideas together define public goods and common property goods, the existence of which make even the most hard-nosed economist recognize the efficiency of governmental action to regulate markets.

{ 6 comments… read them below or add one }

Ben September 22, 2007 at 4:12 pm

It’s been a long while since I did any economics, but I thought an inferior good is (or at least can be) still one you spend more on as your income rises, but proportionately less than what your income rises by – e.g. if your income goes up 10% and you spend 5% more on X then X is inferior.

As for price changes, then you have both an income and substitution effects coming into play, which may explain Giffen goods. The classic example we were given at school was potatoes in Ireland. Suppose you need four units of food a day and would prefer meat (cost 30) to potatoes (cost 10). If you have 60 units of money to purchase these goods, you’ll buy one meat and three potatoes. If the price of potatoes rises to 15, you’re forced to buy four potatoes.

Sean September 24, 2007 at 1:23 am

Milan,

Very interesting post as usual. I am currently in Toronto where I went to an IKEA and I was not that impressed. I thought it was supposed to be high quality, low price. I was not happy with the quality and yet it was expensive. Why I think it seemed to work for many people was the scale of the whole thing. There was a great many goods on offer and the customers seemed quite diverse.

Have you fully furnished your place as yet?

. September 9, 2009 at 4:52 pm

Consider our national furniture habit. In an unpublished paper, Schor writes that “anecdotal evidence suggests an ‘Ikea effect.’ ” We’ve spent more on furniture even as prices have dropped, thereby amassing more of it. The amount entering the United States from overseas doubled between 1998 and 2005, reaching some 650 million pieces a year. Comparing Schor’s data with E.P.A. data on municipal solid waste shows that the rate at which we threw out old furniture rose about one-thirteenth as fast during roughly the same period. In other words, most of that new stuff — and any older furniture it displaced — is presumably still knocking around somewhere. In fact, some seven million American households now have at least one piece of furniture in their storage units. Furniture is the most commonly stored thing in America.

Milan September 9, 2009 at 4:54 pm

Have you fully furnished your place as yet?

My place is ‘fully furnished’ but a lot of the furniture is of poor quality. In particular, my IKEA chairs are very poorly built and now held together with screws I added and gaffer tape.

The NY Times article above makes me want to clear out my closet full of stuff in Vancouver: separate out what I genuinely want and sell, give away, or recycle the rest.

wale January 16, 2013 at 9:37 pm

Thank you now I can distinguish btw an inferior good and veblen good or rather still giffen good thanks but my question is does veblen and giffen good means the same thing?

Milan January 17, 2013 at 10:16 am

This is from Wikipedia:

“The interaction effects are a different kind of anomaly from that posed by Giffen goods. The Giffen goods theory is one for which observed demand rises as price rises, but the effect arises without any interaction between price and preference—it results from the interplay of the income effect and the substitution effect of a change in price.”

Leave a Comment

Previous post:

Next post: