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.