Inferior Good vs Substitute Goods
Inferior Good and Substitute Goods are two Supply & Demand concepts in AP Economics that students often mix up. An inferior good is a good for which demand decreases as consumers' income rises and increases as income falls. Substitute goods are goods that can be used in place of each other to satisfy a particular need or want. Here is how they compare side by side.
Inferior goods have a negative relationship between income and demand. As consumers' incomes rise, they switch to more expensive substitutes, causing demand for the inferior good to fall. Examples include generic products or public transportation.
When the price of one good increases, the demand for its substitute also increases, as consumers switch to the relatively cheaper alternative. Examples include Coke and Pepsi, or butter and margarine.
Inferior Good vs Substitute Goods: Two Labels From Two Different Tests
| Inferior Good | Substitute Goods | |
|---|---|---|
| The test applied | How demand responds to a change in buyers' income | How demand responds to a change in another good's price |
| Elasticity used to classify it | Income elasticity of demand | Cross price elasticity of demand |
| Sign that earns the label | Negative | Positive |
| How many goods the label needs | One | Two, since it describes a pair |
| What happens when incomes fall across an economy | Demand for it rises | Nothing follows automatically, since income is not the test |
| Example phrasing | Store brand pasta, if buyers switch away as income rises | Butter and margarine, if a price rise for one lifts demand for the other |
The labels come out of two different elasticity formulas
These two words answer different questions and use different formulas, which is why one product can carry both labels at once. Inferior is settled by income elasticity of demand, the percentage change in quantity demanded divided by the percentage change in income. Substitute is settled by cross price elasticity, the percentage change in quantity demanded of one good divided by the percentage change in the price of another. Run both on illustrative numbers. A shopper's weekly income rises from 500 to 550, a rise of 10 percent, and her purchases of store brand pasta fall from 20 packets to 18, a fall of 10 percent. Income elasticity is negative 10 divided by 10, which is negative 1. That negative sign makes store brand pasta an inferior good for her. Separately, the price of butter rises from 4 to 5, a rise of 25 percent, and quantity of margarine demanded rises from 40 units to 48, a rise of 20 percent. Cross price elasticity is 20 divided by 25, which is 0.8. The positive sign makes butter and margarine substitutes. Neither calculation used a single input from the other. Practise both at /calculate/income-elasticity-of-demand and /calculate/cross-price-elasticity.
One product can be inferior and a substitute at the same time
Store brand pasta is a good case of both labels landing on one item. As income rises the shopper buys less of it, which satisfies the inferior test. It also competes with the branded version, so a rise in the branded price lifts demand for it, which satisfies the substitute test. Neither label contradicts the other, because one is about the buyer's budget and the other is about a rival good's price. The common error runs the other way, treating substitute as a synonym for cheaper alternative. A substitute need not be cheaper or lower in quality. Two premium brands competing for the same customers substitute for each other, and both can be normal goods whose demand climbs with income. A second trap is direction. Both labels describe a shift of the demand curve rather than a movement along it, since neither income nor a rival's price is the good's own price. If income falls and demand for an inferior good rises, the curve moves right. If a substitute becomes cheaper, demand for this good moves left. Getting that direction wrong costs more marks than misapplying the label. See /glossary/normal-good for the income comparison.
Frequently asked questions
Are inferior goods always substitutes?
No, the two labels come from separate tests and neither one implies the other. A good is inferior when demand for it falls as income rises, and two goods are substitutes when a price rise for one raises demand for the other. Many inferior goods do happen to substitute for a pricier version, but that is a common pattern rather than a rule.
How do you tell whether two goods are substitutes?
Work out the cross price elasticity of demand and read the sign, since a positive value means substitutes and a negative value means complements. Divide the percentage change in quantity demanded of one good by the percentage change in the price of the other. How far the number sits from zero tells you how close the substitution is.
What is the difference between an inferior good and a substitute good?
An inferior good is defined by its relationship with buyers' income, while a substitute is defined by its relationship with another good's price. The inferior label needs one good and a negative income elasticity, and the substitute label needs a pair of goods and a positive cross price elasticity. A single product can satisfy both definitions at the same time.
Live Supply and Demand graph. Drag the curves, or open the full version.
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated