A Giffen Good is a type of good where consumers purchase more as the price increases.
This results in an upward sloping demand curve.
To be classified as a Giffen Good, the item must be an inferior good.
Inferior Goods vs. Giffen Goods
Inferior Good: A good that consumers buy less of as their income increases.
Not all inferior goods are Giffen Goods.
Giffen Good: Must be an inferior good, but not every inferior good is a Giffen Good.
Effects of Price Changes
Substitution Effect
Occurs when the price of a good rises.
Consumers tend to buy less of the good as they substitute it with cheaper alternatives.
Income Effect
As the price of a good rises, the real income or purchasing power of consumers falls.
With inferior goods, consumers buy more when their real income decreases.
This is opposite to normal goods, where consumers buy less as their real income falls.
Interaction of Substitution and Income Effects for Inferior Goods
These effects move in opposite directions for inferior goods.
Substitution Effect: Price increase leads to buying less.
Income Effect: Price increase leads to buying more (for inferior goods).
Specifics of Giffen Goods
For a Giffen Good, the income effect must be stronger than the substitution effect.
The dominant income effect results in consumers buying more of the good after a price increase.
Recap
Giffen Goods are a subset of inferior goods where the income effect dominates the substitution effect, leading to an upward sloping demand curve as prices increase.