Giffen goods

From ZuluNotes - Free Leaving Cert Notes

Giffen goods are inferior goods which have a negative price effect as a result of their high proportion of consumer income: i.e. demand for them rises with price and vice versa. There are no examples of Giffen goods in modern economies.

Effect of a Price Increase on a Giffen Good

1: Substitution Effect: This is always positive; i.e. demand tends to fall as price increases and vice versa.

2: Income Effect: This is strongly negative, as the good is inferior and represents a large proportion of consumer incomes; i.e. demand tends to increase as price rises and vice versa.

3. Price Effect: The strong Income Effect outweighs the Substitution Effect, and as a result, the Price Effect is negative; i.e. demand increases as price rises and vice versa.