IntroductionWhile defining Giffen goods as well as inferior goods, we mention that both refer to those goods which shows a negative income effect. Even some people use both terms interchangeably. But, there exists a slight difference between both of them or we can say that Giffen goods are a type of inferior good but still, they are different because all inferior goods are not Giffen goods.
Understanding the concept of inferior goodsInferior goods refer to those goods which show a negative income effect. Generally, with an increase in income of the consumer, demand for a particular commodity increases but this is not true for all commodities or we can say that this concept applies with normal goods as inferior goods show a negative income effect.
For instance, suppose a poor family consumes millets as a staple diet even in summers, only because millets are relatively cheaper than wheat. But due to an increase in income, they decide to have wheat and reduces the consumption of millets. Therefore, here as we can see that even with an increase in income demand for millets reduces. Hence, in this case, millets are showing a negative income effect or representing inferior goods. On the other hand demand for wheat is increased with an increase in income and hence, wheat here represents normal goods.
It must be noted that there is no such specification that which commodity is inferior good.
Giffen goodsIt is a term propounded by Sir Robert Giffen. Giffen goods are those goods that show a negative income effect, but a positive price effect. Here "negative income effect" is common with inferior goods, that's why all Giffen goods are inferior goods.
This positive price effect can be understood with the help of the following example:
In general, a society consists of three classes of people, lower class or poor, middle class and upper class or rich. Now let us suppose that Mr A belongs to the upper class, Mr B belongs to the middle class and Mr C belongs to the lower class. Mr A can afford both meat and bread in his diet, Mr B can also easily afford bread and sometimes meat also but, Mr C can hardly afford bread. Now due to sudden inflation in the country, prices of both bread and meat rises. Mr A can still afford both the commodities, Mr B who earlier sometimes affords meat, now can only afford bread and hence he spends all his income on bread due to which additional consumption of bread rises. Mr C continues his consumption of bread because in an economy consumption pattern of a consumer can't be zero.
Therefore, even with a price rise, the demand for bread rises because of the shifting of middle-class consumption patterns towards Giffen goods. Hence, in the case of Giffen goods, demand rises even with a price rise, that's why it is an exception to the law of demand.
Why termed as "Giffen paradox"?The literal meaning of paradox is "a contradictory statement". This contradiction can also be understood with the help of an example. Suppose Mr A went to a vegetable market and enquires about the price of potatoes and to that seller the replied, "price of one kg potato is Rs 50. Mr A shocked to see that and said to himself, "potatoes are so much expensive."
When he further enquired about the price of other vegetables he came to know that all are relatively expensive than potatoes. Now again he said, "potatoes are the cheapest". Hence, a consumer makes a contradictory statement. Therefore, even after rising prices of Giffen goods, they are relatively cheaper than other goods which lead to an increase in their demand.
It can be concluded that all Giffen goods are inferior goods but all inferior goods are not Giffen goods.
Frequently Asked Questions
Is there any specification about a particular goods that may be inferior or normal?
No, any good may be inferior and normal depending upon the consumer's preference.