Have you ever found yourself in a situation where you had to choose between two products, one of which was cheaper but of lower quality, while the other was more expensive?
A Giffen good is a type of inferior good where an increase in its price leads to an increase in demand, while an inferior good is a type of product whose demand decreases as consumer income increases.
| Giffen Goods | Inferior Goods |
|---|---|
| Giffen goods are a type of inferior goods that experience an increase in demand when their price increases. | Inferior goods are products that experience a decrease in demand as consumer income increases. |
| The income effect of Giffen goods is negative, meaning that as the price increases, consumers’ real income decreases, causing them to buy more of the Giffen good. | The income effect of inferior goods is negative, meaning that as consumers’ income increases, they tend to buy more expensive substitutes, decreasing the demand for the inferior good. |
| The substitution effect of Giffen goods is positive, meaning that as the price of the Giffen good increases, consumers will switch to purchasing more of the Giffen good as a substitute for other goods. | The substitution effect of inferior goods is negative, meaning that as the price of the inferior good increases, consumers will switch to purchasing cheaper substitutes. |
| There are no exceptions to the behavior of Giffen goods. | Some inferior goods may become normal goods at very low levels of income, meaning that as income falls below a certain threshold, the demand for these goods may increase. |
| The demand curve for Giffen goods is upward sloping, meaning that as the price of the good increases, so does the quantity demanded. | The demand curve for inferior goods is downward sloping, meaning that as the price of the good increases, the quantity demanded decreases. |
| The behavior of these goods violates the Law of Demand, which states that as the price of a good increases, the quantity demanded should decrease. | The behavior of these goods follows the Law of Demand, which states that as the price of a good increases, the quantity demanded should decrease. |
| Examples of Giffen goods include potatoes during the Irish famine and low-quality rice in China. | Examples of inferior goods include fast food, generic brands, and public transportation. |
Introduction to giffen and inferior goods
Giffen goods are items that people purchase more of when the price increases. This seems counterintuitive, but it happens because people see the item as being more valuable when it costs more.
Inferior goods, on the other hand, are items that people purchase less of when the price increases. This is because people see the item as being less valuable when it costs more.
Similarities between giffen and inferior goods
- Both are types of consumer goods, meaning they are purchased by individuals for personal use.
- Both are also normal goods, which means that as income increases, demand for the good increases.
- Both Giffen and inferior goods have a downward-sloping demand curve.
Examples of giffen and inferior goods
Examples of Giffen Goods:
- Rice in poor countries: In some poor countries, rice is a staple food. If the price of rice increases, people may not have enough money to buy other more expensive foods, and they end up consuming even more rice than before, despite the higher price.
- Potatoes during the Irish potato famine: During the Irish potato famine in the 19th century, potatoes were the main source of food for many poor people. When the price of potatoes increased, people could not afford to buy other foods, so they ended up buying even more potatoes, leading to a positive income effect on the demand for potatoes.
Examples of Inferior Goods:
- Instant noodles: Instant noodles are often considered an inferior good, as people tend to consume less of them as their income increases. As people become wealthier, they tend to switch to healthier and more expensive food options.
- Public transportation: In some cities, public transportation may be considered an inferior good. As people become wealthier, they may prefer to use their own cars instead of public transportation, which is often seen as a lower-quality option.
The impact of giffen/inferior goods on the economy
Giffen/inferior goods can impact the economy in two ways. The first is through their effect on consumer behavior. If people think that the prices of Giffen/inferior goods will continue to rise, they will be more likely to buy them now rather than wait. This can lead to inflationary pressures in the economy as people spend more money chasing after these goods.
The second way that Giffen/inferior goods can impact the economy is through their effect on producers. If producers believe that prices for these goods will continue to rise, they may be tempted to increase production in order to take advantage of these higher prices. This can lead to even more inflationary pressures in the economy as companies try to cash in on the high prices.
Key differences between giffen and inferior goods
- Inferior goods are those for which demand falls when income rises. In contrast, Giffen goods are those for which demand increases when income rises.
- Inferior goods are typically basic, necessities that people consume more of when their incomes are low and consume less of when their incomes rise. Examples of inferior goods include rice, beans, and wheat. These are the kinds of things that people need to survive but don’t necessarily want to consume more of as their incomes increase.
- Giffen goods, on the other hand, are typically luxury items that people want to consume more of as their incomes rise. An example of a Giffen good is caviar. As income increases, people can afford to purchase more luxurious items like caviar, and so demand for these items increases.
- Difference between central and commercial banks
- Difference between Internal and External Economies of Scale
- Difference between domestic income and national income
Conclusion
Giffen goods are those that experience an increase in demand when their price increases, while inferior goods are those whose demand decreases as their prices rise. Knowing this information can help you better budget your money and purchase items that offer value for your hard-earned cash.
