Giffen Goods vs Inferior Goods
Giffen goods and inferior goods are quite similar to each other since giffen goods are also types of inferior goods and neither follows the general demand patterns. This is because with regard to each type of product, when savings are made (either due to low price, or higher income) people tend to spend their money on other/alternative products. Despite their similarities, giffen goods and inferior goods are different to one another, and the article offers a clear explanation of each while outlining their similarities and differences.
What are Giffen Goods?
The law of demand states that the demand for goods and services increase as prices fall and the demand falls as prices increase. This is because people purchase less of a product when the prices are high and more of a product when the prices are low. Demand falls with high price as people will start purchasing substitute products that cost less. Giffen goods are special types of products for which the traditional law of demand does not apply. Instead of switching to cheaper substitutes, consumers demand more of giffen goods when the price increases and less of it when the price decreases.
Taking an example, rice in China is considered to be a giffen good because people tend to purchase less when price falls. The reason for this is, when the price of rice falls, people have more money to spend on other types of products such as meat and dairy and, therefore, divert their spending away from rice (despite the fact that rice is cheaper) to better, more expensive products. As rice prices increase, people will consume the same quantity or more by devoting all their income to the one product that they are able to afford.
What are Inferior Goods?
Inferior goods take into consideration the income effect. According to the income effect, as an individual’s income increases the demand for goods and services will also increase. However, that is not the case for inferior goods because people will purchase less of the product as income increases and more of the product as income falls. The reason for this is that, as an individual’s income increases, they are able to spend more money on a product that is of better quality, and will be able to switch to a better quality product rather than using the inferior product. As an example, a radio is an inferior product, and as consumers’ income rises they will demand less for radios and switch to a better more expensive substitute such as a TV set. If their income further increases, the normal TV set will be treated as inferior and they will purchase a high tech flat screen TV.
Giffen Goods vs Inferior Goods
Giffen goods and inferior goods are very similar to each other in that giffen goods are special types of inferior goods. Both these types of products do not follow the general demand patterns laid out in economics and are, therefore, special types of products that are treated differently by consumers as market prices and income levels change. Giffen goods are goods for which demand will fall when price falls as people do not tend to purchase more of a giffen good even if prices are low because they will look for better alternatives, or will spend their money on something else. As income rises people will spend less on inferior goods as they can now afford more expensive, better quality alternatives.
Summary:
• Giffen goods and inferior goods are very similar to each other in that giffen goods are special types of inferior goods and do not follow the general demand patterns laid out in economics.
• In the case for inferior goods, people will purchase less of the product as income increases and more of the product as income falls.
• Instead of switching to cheaper substitutes, consumers demand more of giffen goods when the price increases and less of it when the price decreases.