Inferior Goods and Giffen Goods || Theory of Consumer Behavior || Bcis Notes

Inferior Goods and Giffen Goods || Theory of Consumer Behavior || Bcis Notes

Inferior Goods and Giffen Goods

Inferior Goods and Giffen Goods which demand curve slopes downwards and upwards respectively. Inferior goods are close substitutes and Giffen goods are no close substitutes.

Inferior Goods

If demand for a commodity varies positively with income, it is termed as inferior goods. However, there is an inverse relationship between the price of a commodity and its demand. Inferior goods can be contrasted with ‘normal’ goods which have a positive income elasticity of demand. In simple terms, the quantity demanded by consumers for such goods is indirectly related to the consumer’s income, and so the income elasticity of demand is negative.

The concept of inferior goods is very well known to consumers and sellers, i.e. it is known to all that millet is inferior in comparison to wheat, kerosene is inferior to cooking gas, bidi is inferior to cigarette and so on. Therefore, such goods have better alternatives regarding quality (called superior goods). When the income of the consumer rises, he can afford high priced articles over low priced ones.

Giffen Goods

  • Giffen goods are goods whose demand increases with the increase in its price and vice versa. Giffen goods are described as goods that show the direct price-demand relationship, i.e. demand for good increases with an increase in the price, violating the law of demand. When the price of good falls, consumers do not purchase it more, as they seek better alternatives.
  • It is due to the reason that the income effect of higher price supersedes substitution effect.
  • It includes those goods which consumers considers inferior and which occupy an essential place in consumer’s budget such as wheat, rice, etc.
  • Sir Robert Giffen, an economist, revealed the fact that, with the rise in the prices of bread, the British workers purchased more of it, which 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.

Difference Between Inferior Goods and Giffen Goods

Inferior Goods Giffen Goods
1.      Inferior goods are goods whose demand falls down with the rise in the consumer’s income over a specified level. 1.      Giffen goods refer to those goods whose demand goes up with the rise in prices.
2.      The determinant of demand. 2.      The exception to the law of demand.
3.      Close substitutes. 3.      No close substitutes.
4.      Positive price effect.  4.   Negative price effect.
5.      Downward sloping demand curve. 5.      Upward sloping demand curve.

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