Individual and market demand - The income and substitution effects of a price change - Giffen goods
3 important questions on Individual and market demand - The income and substitution effects of a price change - Giffen goods
The law of demand states that the demand dor a good should fall if the price of that good increases. By contrast, a Giffen good is one:
For which the quantity demanded rises as its price rises.
The two characteristics that a Giffen good would logically have to posses:
1. It would not only have to be inferior, but also have to occupy a large share of the consumers budget. (otherwise, an increase in its price would not create a significant reduction in real purchasing power).
2. It has a relatively small substitution effect, one small enough to be overwhelmed by the income effect.
2. It has a relatively small substitution effect, one small enough to be overwhelmed by the income effect.
The demand for a product can increase the higher the price, but this does not always imply the product in question is a Giffen good. For example, a Veblen good is a good:
That appeals precisely because it is expensive enough that inly the rich can afford it.
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