Association of Chartered Certified Accountants (ACCA) Certification Practice Test

How is an inferior good defined?

1. A good for which demand increases with rising income

2. A good for which demand decreases as income rises

3. A good that is considered essential

4. A luxury good that is non-essential

The correct answer is: A good for which demand decreases as income rises

An inferior good is defined as a type of good whose demand decreases as consumer income rises. This means that as people have more income, they tend to buy less of this good, opting instead for higher-quality alternatives or superior goods. For example, if an individual's income increases, they may choose to buy less instant noodles (an inferior good) in favor of fresh produce or gourmet food items. In contrast, the other options provide definitions that do not align with the concept of inferior goods. For instance, a good for which demand increases with rising income describes a normal good, not an inferior one. Essential goods are typically necessities that people purchase regardless of income levels. Luxury goods, on the other hand, refer to expensive items that are not considered essential and are purchased when individuals have excess disposable income. Therefore, the key characteristic of inferior goods is their inverse relationship with income, distinguishing them from normal and luxury goods.