Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Inferior goods typically exhibit which of the following demand characteristics?

1. Demand remains constant as income rises

2. Demand increases as income rises

3. Demand falls as income rises

4. Demand is not influenced by consumer preferences

The correct answer is: Demand falls as income rises

Inferior goods are characterized by an inverse relationship between demand and consumer income. Specifically, as consumers' incomes increase, they tend to purchase less of inferior goods because they shift their consumption preferences towards higher-quality alternatives or more expensive products. For instance, if an individual earns a higher income, they may choose to buy branded products instead of generic or lower-quality options, which are considered inferior goods. This demand behavior clearly illustrates the fundamental nature of inferior goods, where demand decreases as income rises, aligning with option C. Elements like demand remaining constant or increasing with income do not accurately reflect the characteristics of inferior goods, as those would imply that consumer preferences are unchanged or actually favor lower-quality products as they can afford more. Similarly, the notion that demand is not influenced by consumer preferences does not apply, as consumer choice is a significant factor in determining the quantity demanded of inferior goods as income fluctuates.