Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Which of the following describes an inferior good?

1. A good for which demand rises as income increases

2. A good for which demand falls as income rises

3. A good that has a perfectly elastic demand

4. A luxury good that is rarely purchased

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

An inferior good is defined by its demand characteristics in relation to changes in consumer income. When consumer income rises, the demand for inferior goods tends to fall. This behavior occurs because consumers typically seek higher-quality substitutes when they have more income available, thus reducing their consumption of goods that are considered lower quality or less desirable. For example, products like instant noodles or second-hand clothing often see a decrease in demand as people have more disposable income and can afford higher-quality items. Understanding this relationship is crucial for economic analysis and consumer behavior, particularly in assessing how shifts in the economy can influence market demand for different types of goods. The other choices do not accurately reflect the definition of inferior goods. A good for which demand rises as income increases is classified as a normal good, while perfectly elastic demand does not relate to changes in income but indicates an extreme sensitivity of quantity demanded to price changes. Luxury goods, by definition, are typically associated with higher income levels and do not reflect the characteristics of inferior goods.