Short Notes on Giffen good
Posted by Ripon Abu Hasnat on Tuesday, September 16, 2014 | 0 comments
In economics and consumer theory, a Giffen good is a product that people
consume more of as the price rises—violating the law of demand. Normally, as
the price of goods rises, the substitution effect makes consumers purchase less
of it, and more of substitute goods. In the Giffen goods situation, the income
effect dominates, leading people to buy more of the goods, even as its price
rises.
A Giffen good is typically an inferior product that
does not have easily available substitutes, as a result of which the income
effect dominates the substitution effect. Giffen goods are quite rare, to the
extent that there is some debate about their actual existence. The term is
named after the economist Robert Giffen.
For a Giffen good to exist, theoretically three
extraordinary economic characteristics must exist at the same time:
·
The good must be an
inferior good, such that the demand for the good decreases with an increase in
consumer income
·
The good must have an
extraordinary income effect, such that a decline in price of the good causes a
significance rise in real income or wealth by consumers due to the savings
·
There must be no
substitutes available for the good.
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