Monday, January 30, 2012

Tata Nano: An Inferior Good?

How cheap is too cheap? Apparently, the Tata Nano is too cheap. So much so that people stay away from it just because of its low price:
“A Nano is always bandied about as a poor man’s car. Nobody wants to be caught with it,” said Punnoose Tharyan, editor of India’s Motown magazine.
In economic terms, this would be considered to be an inferior good. The term inferior is somewhat misleading in the sense that it implies that the Nano is of poorer quality. Economists are not a particularly creative species. They do not come up with very good names for economic terms. Another example would be using "utility" to represent satisfaction. And the unit used to measure the amount of satisfaction is "utils".

Essentially, a good is considered "inferior" when the quantity demanded of the good decreases as its price decrease. This is opposed to a "normal" good where quantity demanded increases as its price decrease.