Hi Everyone,
This short video explains what is meant by ‘Giffen Goods’. There are several types of goods and services. They generally fall under the categories of luxury goods, normal goods, and inferior goods. giffen goods are a type of inferior good. The video explains why giffen goods are different from other inferior goods and why it is important to understand this difference.
You can watch the video using the link below:
What are Giffen Goods?
A giffen good is particular type of inferior good. An inferior good has a negative income elasticity. As income increases the demand for an inferior good falls.
When the price of an inferior good falls, ceteris paribus, real income falls. Real income increases as a person can buy more with the same nominal income. A fall in price also means that the good or service becomes relatively cheaper compared to other goods and services. This relative price fall will increase quantity demanded. The change in demand due to the change in real income is known as the income effect.
The change in quantity demanded due to a price change in the absence of any change in real income is the price effect. For an inferior good to be considered a giffen good, the income effect needs to be greater than the substitution effect. If the income effect is greater, a price fall will result in a lower quantity demanded and an increase in price will result in a higher quantity demanded. Hence, we have what we call an upward sloping demand curve. See the graph below.
Key Points from the Video
Giffen goods can potentially exist for those with insufficient income to be able to sufficiently meet their needs or wants. Therefore, the lower quality good or service acts as a substitute for the good or service they actually desire. As soon as that person experiences an increase in real income, which could be because of a fall in the price of the giffen good, they will acquire more of the goods and services that they actually want.
There are not many real examples of giffen goods in the world today. For example, rice in most places in the world is not normally treated as a giffen good. Though, it is probably one of the better examples of a good that is more likely to be a giffen good.
Questions
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Other related posts
For more information on giffen goods, indifference curves and other aspects of consumer theory, you can access my other posts and videos using the following links.
My giffen goods post can be accessed using the following link:
My indifference curves post can be accessed using the following link:
My indifference curves video can be accessed using the following link:
For more information regarding demand, supply and equilibrium, you can read my Steemit blog using the following link:
You can also watch my demand and supply video on Dtube using the following link:
For more information on utility, you can read my Steemit blog using the following link:
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