Today in my intermediate microeconomics class with professor Nathan Hampton, we were discussing income elasticity where the topic of inferior and normal goods came up.
First some explanation. All elasticity means is how sensitive people are to changes as measured through percent changes. It measures how responsive people are to changes in price, income, prices of other goods, etc. So when we talk about income elasticity (of demand), we’re talking about how consumers change their buying behavior when their income changes (mathematically, this can be represented as %ΔQuantity/%ΔIncome). Typically, when incomes increase, so does demand for a good. That good is called a normal good. If, however, your demand for a good decreases when your income increases, it is called an inferior good. It does not have necessarily anything to do with the quality of that good—it simply means, as an objective observation, quantity demanded goes down as income increases. (Think about goods such as cheap beer, Spam meat, ramen noodles, or public transportation.)
Dr. Hampton made the claim today that college education is an inferior good. This would mean that as people’s incomes increases, demand for college education would decrease. The reason for this, he posits, is that as people graduate, their incomes rise because of employment and they no longer have a need for an education. I disagree with this analysis. It certainly might be observed that a college graduate’s income rises but his demand for a college education does not. I do not think this means, however, that college education is an overall inferior good (it may be for a college graduate, but there are more people to consider). There may be people in an economy who previously were incapable of attending college because of budget restraints, but are now able to attend college because their income rose. And this is generally the case when incomes rise.
The price for a year of college education in 1970 was $2,530. In 2007, it was $27,560. Even with this radical price increase, however, college attendance in 2007 was much higher than in 1970 (nominally and relatively). The reason for this (among some others) is because incomes have also increased since 1970, and thus more people have “demanded” college educations. This suggests to me that college education is not an inferior good, but is in fact a normal good. My analysis could be wrong for various reasons, but I think I’m right.
June 11, 2009 at 11:59 PM
When the economy is not doing well and jobs are hard to find (and income is down), a lot of people “hide out” in school or go back to get a Masters or Doctoral degree. I know of some seniors at SCSU that could have graduated but chose not to because they know they’ll have a hard time finding a job anyway. If the opportunity cost of getting an education includes the lost wages from the job you have to give up so that you can go to school, then when you have no job to go to anyway, the opportunity cost of an education falls, so people are more likely to go. Maybe one should call it “counter-cyclical” and not inferior. Inferior implies there is a better substitute out there that you just can’t afford, and that’s not at all what’s happening in the market for education.
June 12, 2009 at 11:35 AM
Yeah, that makes a lot of sense to me. Thanks for the explanation.
June 12, 2009 at 12:56 PM
It’s a difficult situation because I think there are two things going on here, one having to do with levels of income and one having to do with fluctuations in those levels. If you just look at a long-run trend, you’ll surely find that countries that have higher incomes spend more on education — in that sense, education is a normal good. But there’s also that counter-cyclical nature to it as well. So I’d say that overall the demand for education is rising as standards of living improve, but when there is a temporary dip in income because of recession, the demand increases even more because of that change in the O.C. of getting an education.
June 22, 2009 at 1:42 PM
Interesting post, I like it.
“There may be people in an economy who previously were incapable of attending college because of budget restraints, but are now able to attend college because their income rose.”
On the contrary, I know of at least a few people (off the top of my head) who decided to go to school specifically because their income otherwise was not enough to live according to what they thought their standard of living should be. They simply took out extra in student loans.
June 22, 2009 at 2:45 PM
Yes, that’s a good point. As income decreases, some might be more willing to attend university (implying an inferior good). I wonder how prevalent that is though.
June 22, 2009 at 2:58 PM
“As income decreases, some might be more willing to attend university (implying an inferior good).”
I think you mean to say, “We could infer that this is an inferior good.”
Just joshing.