anonymous
  • anonymous
Please explain what a Giffen good is and how it violates laws of demand?
OCW Scholar - Principles of Microeconomics
jamiebookeater
  • jamiebookeater
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anonymous
  • anonymous
All right, well, an ordinary good is one for which demand for it decreases when the price increases, and vice versa. A Giffen good is the opposite of an ordinary good
anonymous
  • anonymous
OK, then demand for Giffen goods must increase as price increases
anonymous
  • anonymous
True, and the simple law of demand is almost an obvious idea: as price increases, consumers demand less. Make sense right? You'd rather pay less for a good than more...

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anonymous
  • anonymous
Haha, of course. Sorry, I was getting confused with changes in price and changes in income. Thanks!
anonymous
  • anonymous
A Giffen good is an extreme type of inferior good. The negative income effect of changes in price of a Giffen good is actual stronger than the substitution effect. This leads to its bizarre quality: when the price of a Giffen good rises, consumers actually buy more.To understand how this happens, consider the example of a Giffen good for which there is the best evidence that it is a Giffen good. Households in the Hunan province of China were shown to buy more rice when they had to buy it at a higher price, and less when the price they paid was subsidised. The reason for this is that, even when expensive, rice was still the cheapest source of calories available. Therefore, when the price of rice was cut, households had more money left over after buying rice. Some of this was spent on buying more expensive foods (meat, vegetables and fruit), which reduced their need for rice.
anonymous
  • anonymous
And it violates the law of demand because according to the law of demand, the demand of a good decreases with increase in price, but in the case of a giffen good, demand increases with price increase.That violates the law of demand.

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