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Tedc
Normal, Inferior, and Giffen Goods

Kind of struggling to wrap my head around these three, and all the substitution, income, and price effect stuff. I get that "all Giffen goods are inferior goods, but not all inferior goods are Giffen goods", but I'm having a hard time explaining it in a question. My textbook isn't great and https://www.thebusinessguys.ie/ewExternalFiles/Demand.pdf was a bit useful, but I still can't just put it right in my own words. Any help?


3 Comments
EKirwan
EKirwan
The 'price effect' is what happens to the quantity demanded of a good when there is a price change. This effect depends on two things: the type of good in question and the effect of the income or substitution effect. For example when the price of a normal good increases, quantity demanded falls for two reasons. Firstly when the price rises, consumers' real income falls and this means they can afford to buy less goods. This is the income effect. At the same time, when the price rises some consumers who used to buy the item will now swap to cheaper alternatives. This is the substitution effect. Both the income and substitution effect here lead to an overall fall in quantity - all because of one price increase. Take inferior goods for example when there is a price decrease. This means consumers' real income rises and because of the nature of inferior goods, when income rises people buy less as they can now afford the superior substitute. So the income effect is negative here (people buy less). At the same time, when the price of an inferior good falls, consumers switch to this product from a more expensive alternative. This is the substitution effect which is positive. Therefore, in the case of an inferior good (and giffen good) because the income effect is negative and the sub effect is positive, the overall price effect depends on which is bigger.
padgekelly
the negitve substatution effect in giffen goods is stronger than in inferior goods
IsaacKelly18
substitution effect is concerned with the law of equi marginal returns. if the price of a good increases or decreases, we are no longer in equilibrium. if the price of a normal good increases, we have to get back to equilibrium. it doesnt matter if the good is more expensive or cheaper. for inferior goods that are not giffen,the same rule applies for substitution effect. but for the income effect, an increase in our real income will cause our demand to fall because theyre inferior. Inferior giffen goods are different as the represent a large % of allocated expenditure for low income families. substiution effect is negative for an increase in price of these goods as they represent a large quantity of waht poorer families purchase. price rise will cause a demand rise.
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