Question

Please explain what a Giffen good is and how it violates laws of demand?

Answer 1

We usually assume the demand curve of a good is downward sloping, say a normal good. In fact, it consists of two effects - price and income effects.

Suppose that we are in an economy that only has one good (e.g., x). When the price of x falls, our real income (or purchasing power) increases. Regardless the nature of x, when price falls, the quantity of demand increases; i.e., the price effect. However, if x is an inferior good, then the quantity demand decreases since the real income increases; i.e., income effect. If the (negative) income effect outweighs the price effect, then the quantity demand decreases when price decreases. In this case, the demand curve of x is upward slopping (a curve that depicts positive relations between quantity and price). x is then called Giffen good. It is largely a hypothetical phenomenon. However, some textbooks quote potatoes during the World War period as an example.

Answer 2

The law of demand states that price of a good or service is inversely related to the quantity demanded of that particular good or service.

The law of demand is perfectly valid in the case of normal goods in which any change in the price of good affects the demand of the good service. If the price of good declines then its demand rises and if the price of the good or service increases then it decreases.

However, in case of giffen good the case is just opposite people consume more and more of a giffen good even if its price increases. So if we have to put in other words then according to law pf demand there is inverse relationship between the prices and the demand of good and services, in case of Giffen goods the situation is reversed and there is a direct relationship between the prices and demand of giffen goods.

Hope so this helps

Answer 3

ipm1988, I do not entirely agree with you. The price and quantity demand of inferior good are also inversely related with each other. For inferior good, price effect dominates income effect. So, its demand curve is also downward slopping in a (quantity, price) Descarte plan.

Answer 4

@Stsang Giffen goods are inferior goods but Giffen good is a very special case of inferior goods.

Answer 5

I, of course, know that Giffen good is a kind of inferior good. As discussed, any good whose quantity demand negatively relates to real income is an inferior good. As mentioned, whether the demand curve of a good is upward or downward sloping is determined by income and price effects. Giffen good is the only situation where the demand curve is upward sloping, as its income effect outweighs price effect.

Answer 6

the simple law of demand is that an increase in price will lower the quantity of the good or service demanded. However, for Giffen goods, this is the opposite. I.E, the higher the price, the more there is the demand for the good. An example of a Giffen good would be The Rolls-Royce Phantom or Louis Vuitton products. People are much more willing to but these products if the price is higher than the opposite.
An inferior good also does violate the law of demand. For instance, in the victorian Era when England was poor, people where willing to buy more bread even when the price went higher. This is because bread was a staple food and they would rather sacrifice other goods and buy more bread.
I hope this helps.

Answer 7

In economics and consumer theory, a Giffen good is one which people paradoxically consume more of as the price rises, violating the law of demand. In normal situations, as the price of a good rises, the substitution effect causes consumers to purchase less of it and more of substitute goods. ...