Superior good
Encyclopedia
Consumption (economics)
Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...
as income
Income
Income is the consumption and savings opportunity gained by an entity within a specified time frame, which is generally expressed in monetary terms. However, for households and individuals, "income is the sum of all the wages, salaries, profits, interests payments, rents and other forms of earnings...
rises, and therefore are a type of normal good
Normal good
In economics, normal goods are any goods for which demand increases when income increases and falls when income decreases but price remains constant, i.e. with a positive income elasticity of demand...
s in consumer theory
Consumer theory
Consumer choice is a theory of microeconomics that relates preferences for consumption goods and services to consumption expenditures and ultimately to consumer demand curves. The link between personal preferences, consumption, and the demand curve is one of the most closely studied relations in...
. Such a good must possess two economic characteristics: it must be scarce
Scarcity
Scarcity is the fundamental economic problem of having humans who have unlimited wants and needs in a world of limited resources. It states that society has insufficient productive resources to fulfill all human wants and needs. Alternatively, scarcity implies that not all of society's goals can be...
, and, along with that, it must have a high price. The scarcity of the good can be natural or artificial; however, the general population (i.e., consumer
Consumer
Consumer is a broad label for any individuals or households that use goods generated within the economy. The concept of a consumer occurs in different contexts, so that the usage and significance of the term may vary.-Economics and marketing:...
s) must recognize the good as distinguishably better. Possession of such a good usually signifies "superiority
Superior (hierarchy)
In a hierarchy or tree structure of any kind, a superior is an individual or position at a higher level in the hierarchy than another , and thus closer to the apex. It is often used in business terminology to refer to people who are supervisors and in the military to people who are higher in the...
" in resources, and usually is accompanied by prestige.
The prestige-value of some superior goods is so high that a price decline would lower demand; these are Veblen goods.
The income elasticity of a superior good is above one by definition, because it raises the expenditure share as income rises. A superior good also may be a luxury good
Luxury good
Luxury goods are products and services that are not considered essential and associated with affluence.The concept of luxury has been present in various forms since the beginning of civilization. Its role was just as important in ancient western and eastern empires as it is in modern societies...
that is not purchased at all below a certain level of income. Examples would include smoked salmon
Smoked salmon
Smoked salmon is a preparation of salmon, typically a fillet that has been cured and then hot or cold smoked. Due to its moderately high price, smoked salmon is considered a delicacy.-Presentation:...
and caviar
Caviar
Caviar, sometimes called black caviar, is a luxury delicacy, consisting of processed, salted, non-fertilized sturgeon roe. The roe can be "fresh" or pasteurized, the latter having much less culinary and economic value....
, and most other delicacies. On the other hand, superior goods may have a wide quality distribution, such as wine
Wine
Wine is an alcoholic beverage, made of fermented fruit juice, usually from grapes. The natural chemical balance of grapes lets them ferment without the addition of sugars, acids, enzymes, or other nutrients. Grape wine is produced by fermenting crushed grapes using various types of yeast. Yeast...
and holiday
Holiday
A Holiday is a day designated as having special significance for which individuals, a government, or a religious group have deemed that observance is warranted. It is generally an official or unofficial observance of religious, national, or cultural significance, often accompanied by celebrations...
s; however, though the number of such goods consumed may stay constant even with rising wealth, the level of spending will go up, to secure a better experience.
Confusion with normal goods
The choice of the word "superior" to define goods of this type suggests that they are the antonymAntonym
In lexical semantics, opposites are words that lie in an inherently incompatible binary relationship as in the opposite pairs male : female, long : short, up : down, and precede : follow. The notion of incompatibility here refers to the fact that one word in an opposite pair entails that it is not...
of "inferior goods", but this is misleading; an inferior good can never be a superior good, but many goods are neither superior nor inferior. If the quantity of an item demand
Demand
- Economics :*Demand , the desire to own something and the ability to pay for it*Demand curve, a graphic representation of a demand schedule*Demand deposit, the money in checking accounts...
ed increases with income, but not by enough to increase the share of the budget
Budget
A budget is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods...
spent on it, then it is only a normal good
Normal good
In economics, normal goods are any goods for which demand increases when income increases and falls when income decreases but price remains constant, i.e. with a positive income elasticity of demand...
and is not a superior good.
Consumption of all normal goods increases as income increases. For example, if income increases by 50%, then consumption will increase (maybe by only 1%, maybe by 40%, maybe by 70%). A superior good is a normal good for which the proportional
Exponential growth
Exponential growth occurs when the growth rate of a mathematical function is proportional to the function's current value...
consumption increase exceeds the proportional income increase. So, if income increases by 50% then consumption of a superior good will increases by more than 50% (maybe 51%, maybe 70%).
In economics terminology, all goods with an Income elasticity of demand greater than zero are "normal", but only the subset having income elasticity of demand > 1 are "superior".
Some texts on microeconomics
Microeconomics
Microeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...
use the term Superior good as the sole alternative to an inferior good, making "superior goods" and "normal goods" synonymous. Where this is done, a product making up an increasing share of spending under income increases is often called an Ultra-superior good.
External links
- Definition of superior good from the elasticity perspective from the University of MichiganUniversity of MichiganThe University of Michigan is a public research university located in Ann Arbor, Michigan in the United States. It is the state's oldest university and the flagship campus of the University of Michigan...
- Definition of "superior good" as a "normal good" synonym from California State UniversityCalifornia State UniversityThe California State University is a public university system in the state of California. It is one of three public higher education systems in the state, the other two being the University of California system and the California Community College system. It is incorporated as The Trustees of the...