DIFFERENCE BETWEEN GIFFEN GOODS AND INFERIOR GOODS PDF

Nov 24, The difference between Giffen Goods and Inferior Goods is that people will purchase less of the inferior goods as income increases and. May 9, Hey Inferior good is a good whose demand increases when the consumer’s income decreases and whose demand decreases as the. In economics, an inferior good is a good whose demand decreases when It was noted by Sir Robert Giffen that in Ireland during the 19th century there was a rise in the price of potatoes. The poor people were.

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The effect of the increase of income on the consumption of goods is known from empirical evidence. In most cases it is observed that the income effect is positive, that is, increase in income leads to the increase in consumption of the good. But there are some goods of which the consumption is known to diminish with the increase in income, that is, income effect for them is negative. Such goods are called inferior goods.

The consumption of inferior goods decreases with the rise in income, for they are replaced by the superior substitutes at higher levels of income.

The goods with income effect or income elasticity negative have been called inferior goods, since income effect is mostly negative in case of commodities which are of physically inferior quality. It may however be pointed out that inferior good need not be one which is of physically inferior quantity and also it is not necessary that the substitute which replaces the so called inferior goods should have any physical characteristics common with them.

Suppose an individual is induced to buy a car by a small rise in income, he will then be forced to economize on several goods which he was previously consuming. As a result, the consumption of the goods on which the individual ordinarily spends his income will fall as a result of the particular small rise in income which induced the individual to buy the car.

Let us now consider the effect of a change in price of an inferior good on its consumption or demand. Substitution effect of the fall in price of a good, as proved above, always tends to increase the consumption of the good. But the income effect of the fall in price of an inferior good will diminish the consumption of the good.

Therefore, in case of inferior goods the income effect will work in the opposite direction to the substitution effect. But the income effect of the change in price of a good is generally quite small. This is so because a person spends no more than a small proportion of his income on a single good with the result that not even large proportional falls in the price of a good will produce a cost difference which is more than a small fraction of his income.

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Thus, unless the demand for a good is exceedingly responsive to the changes in income, that is, unless the income elasticity of demand is extremely large, the income effect of the change in price must be quite small in relation to previous consumption. Therefore, in case of an inferior good although the income effect works in the opposite direction to the substitution effect, it is unlikely that it will outweigh the substitution effect.

The net result of the fall in price of an inferior good will then be the rise in its consumption because the substitution effect is larger than the negative income effect. Thus, the law of demand i. The case of inferior goods in which inverse price-demand relationship holds good is depicted in Fig Suppose the price of good X falls so that the opportunity line shifts from position aa to bb.

In other words, substitution effect leads to the increase in the consumption of good X. But, since the good X is now supposed to be an inferior good, the income effect of the price change will tend to diminish the demand.

It is evident from Fig. Thus inverse price-demand principle will also hold in most cases of the inferior goods. If follows from the above analysis that exception to the law of demand can occur if in the case of an inferior good the negative income effect is so large that it outweighs the substitution effect. Now, the income effect can be very large if the income elasticity of demand is very high and also the proportion of income spent on the good is quite large.

When the negative income effect overwhelms the substitution effect, the net result of the fall in price will be to diminish the amount demanded.

The inferior goods for which there is direct price-demand relationship are known as Giffen goods. Thus Giffen goods, which are exceptions to the Marshallian law of demand can occur when the following three conditions are fulfilled: The Giffen good case is demonstrated in Fig.

Here the position B lies to the left of original position A indicating that there is decrease in amount demanded of the good X as a result of the fall in price. Since negative income effect is bstween than the substitution effect, B lies even to the left of showing fall in consumption of X as a result of the fall in its price.

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Inferior good – Wikipedia

It is very unlikely that the three conditions for the Giffen good case to occur will be satisfied in the case of any ordinary good. To establish law of demand, he takes the assumption that consumer yoods according to a scale of preferences. Thus, it is the weak logical ordering and preference hypothesis which are the hallmarks of the methodology of Hicks in his new theory of demand as distinct from indifference curve approach.

He is free from positivist behaviouristic restrictions on the study of consumer s behavior and he also avoids contentions about the supposedly empirical assumptions regarding rational action.

Instead he starts from a fundamental postulate, girfen preference hypothesis. Besides the innovation of logic of order and preference hypothesis, J.

Inferior good

Hicks also corrects some of the mistakes of indifference curve analysis, namely, continuity and maximizing behaviour on the part of the consumer. He now abandons the use of indifference curves and therefore avoids the assumption of continuity.

Instead of assuming that consumer maximizes the satisfaction. Hicks now, like Samuelson, relies on consistency in the behaviour of the consumer which is a more realistic assumption.

Further, indifference curves could be usefully employed for two goods case, but Hicksian new theory based on preference hypothesis and logic of order is more general and is capable of being easily applied in cases of more than two goods In fact.

Hicks himself in his second part of this book presented a generalised version of demand theory covering cases of more than two goods by deducing from preference hypothesis and logic of order.

Further credit goes to J. Hicks for distinguishing, for the first time, between strong ordering and weak ordering forms of preference hypothesis. Further, by separating substitution effect from income effect with the weak ordering approach. Hicks has been able to explain complementary and substitute goods in his differencw version of demand theory. Hence, in our view.