I spend a lot of time thinking about how to use economics to create safer, more secure systems. That’s what’s been driving my forays into seeing if how economists deal with grey markets might work in infosec, what we as system designers can learn from game theory, how to connect secure networks using graph theory (haha), why submitted a paper to WEIS, and why, now, I’ve gone back to school (again) to study economics in more depth. I’m taking microeconomic theory now. It’s just like micro the last two times around, with less folksy examples and more calculus.
So. What I want to talk to you about is a little idea I had regarding inferior goods as they may relate to a firm’s level of maturity, and how that might be interesting both on it’s own, and if we had the concept of a CPI (consumer price index) for security. Let’s call this @selenakyle’s Security CPI, in case anyone wants to adopt this idea in the pantheon of the Hutton Security Mendoza line or Corman’s HD Moore’s law.
What’s an inferior good?
The simple answer is: an inferior good is one where when consumer income rises, their demand for the good decreases. (Period. “Inferior goods” as a concept is totally distinct from information asymmetry and conversations about lemon markets)
More detail on inferior goods:
Start with the assumption that consumers seek to maximize their utility given a fixed budget, i.e. they have an income, and they spend it in a way to get the most for their money, given their individual preferences. When consumers experience an increase in income, they will consume *more* of most goods (due to rational utility maximization and non-satiation) but will purchase less “inferior” goods – potentially because they can afford better.
A classic example is potatoes within a food budget; when income goes up many consumers will purchase less potatoes…and more meat, or higher-end food items. So, the effect of changes in prices may also be affected by the mix of normal vs inferior goods in the bundle. An example – when prices go up and income stays flat, a consumer may change their mix to include more inferior goods. Or another example – when prices are flat and income goes up, a consumer may shift their mix to include less inferior goods. In any case, the consumer will shift their consumption to maximize their utility, and adjust to new prices or income levels.
The key here is what happens as income rises: does the mix of products in the bundle consumed change (preferences shift) or is it just *more* of the products (same preferences)?