August 29, 2015

Giffen Goods

What are Giffen Goods?
A giffen good is an inferior good(a good that people buy more of when their income goes down) with the unique characteristic that an increase in price actually increases the quantity of the good that is demanded.  This provides the unusual result of an upward sloping demand curve. The Giffen goods which fail with Law of Demand. Giffen goods are goods that are substitutes for a more expensive good, that people buy more of when they cannot afford a superior good.( Funny example is China  made Iphone).

So what is Law of Demand Actually. How Giffen goods fail?
To understand Giffen goods, you must understand both the substitution effect and the income effect.
Substitution effect: When the price of a good decreases, there is more consumption of this good.  This is always positive.

Income effect: When the price of a good falls, the total expenditure (or portion of your income spent on this good) changes.  This can be positive or negative.

A negative income effect will only occur for inferior goods. For a Giffen good, the item is so inferior that if its price falls you will buy less of it (extremely negative income effect) and that if its price rises you will buy more of it (your income falls so you buy more inferior goods).
Also Read:


No comments: