DIFFERENCE BETWEEN NORMAL INFERIOR AND GIFFEN GOODS PDF

Despite their similarities, giffen goods and inferior goods are different to one another, and the article offers a clear explanation of each while outlining their similarities and differences. What are Giffen Goods? The law of demand states that the demand for goods and services increase as prices fall and the demand falls as prices increase. This is because people purchase less of a product when the prices are high and more of a product when the prices are low. Demand falls with high price as people will start purchasing substitute products that cost less. Giffen goods are special types of products for which the traditional law of demand does not apply.

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Despite their similarities, giffen goods and inferior goods are different to one another, and the article offers a clear explanation of each while outlining their similarities and differences. What are Giffen Goods? The law of demand states that the demand for goods and services increase as prices fall and the demand falls as prices increase. This is because people purchase less of a product when the prices are high and more of a product when the prices are low. Demand falls with high price as people will start purchasing substitute products that cost less.

Giffen goods are special types of products for which the traditional law of demand does not apply. Instead of switching to cheaper substitutes, consumers demand more of giffen goods when the price increases and less of it when the price decreases. Taking an example, rice in China is considered to be a giffen good because people tend to purchase less when price falls. The reason for this is, when the price of rice falls, people have more money to spend on other types of products such as meat and dairy and, therefore, divert their spending away from rice despite the fact that rice is cheaper to better, more expensive products.

As rice prices increase, people will consume the same quantity or more by devoting all their income to the one product that they are able to afford. What are Inferior Goods? Inferior goods take into consideration the income effect. However, that is not the case for inferior goods because people will purchase less of the product as income increases and more of the product as income falls.

If their income further increases, the normal TV set will be treated as inferior and they will purchase a high tech flat screen TV. Giffen Goods vs Inferior Goods Giffen goods and inferior goods are very similar to each other in that giffen goods are special types of inferior goods. Both these types of products do not follow the general demand patterns laid out in economics and are, therefore, special types of products that are treated differently by consumers as market prices and income levels change.

Giffen goods are goods for which demand will fall when price falls as people do not tend to purchase more of a giffen good even if prices are low because they will look for better alternatives, or will spend their money on something else. As income rises people will spend less on inferior goods as they can now afford more expensive, better quality alternatives.

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Difference Between Giffen Goods and Inferior Goods

Positive Definition of Giffen goods Giffen goods are described as goods that show direct price-demand relationship, i. When the price of good falls, consumers do not purchase it more, as they seek better alternatives. It is due to the reason that income effect of higher price supersedes substitution effect. Sir Robert Giffen, an economist, revealed the fact that, with the rise in the prices of bread, the British workers purchased more of it, that reverses the general law of demand. The reason behind this is that when the price of bread hiked, it resulted in a huge decline in the spending power of poor people that they were bound to cut down the consumption of expensive goods. And even after the rise in prices of bread, it is still the least costly food item, so the demand for it increased. Definition of Inferior Goods Goods whose quantity demanded decreases when the income of the consumer increases beyond a certain level and vice versa, are called inferior goods.

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