Hello. In this video I'm going to talk about a Giffen Good. So what is a Giffen Good?
A good that consumers buy more of as the price of the good rises. This gives rise to an upward sloping demand curve. A Giffen Good must be an inferior good.
An inferior good is a good that people buy less of as their income rises. But bear in mind, not all inferior goods are Giffen Goods. First and foremost, a Giffen Good is an inferior good.
good but not every inferior good is a given good. So I want to talk about a substitution effect and income effect of a price change for an inferior good. So the substitution effect is as the price of of a good rises, consumers buy less of it as they substitute to relatively cheaper alternatives.
So that's the substitution effect of a price change, in this case a price increase. And now let's look at an income effect of a price change. As the price of a good rises, consumers'real income falls, or purchasing power falls, and with an inferior good, consumers will buy more of the good as income falls.
Now if this was a normal good, As a price of a good rises, consumer real income falls, and they tend to buy less of it. But here I'm specifying the income effect for an inferior good. So with an inferior good, the substitution effect and income effect move in opposite directions.
The substitution effect of a price increase, once again, is consumers buy less. The income effect of a price increase with an inferior good is consumers buy more. So what about this Giffen good? So for a Giffen good, to get a Giffen good, the income effect must be larger or dominate the substitution effect.
So the overall effect is that consumers buy more units of a good following a price increase. So to recap, a Giffen good is an inferior good, and its income effect dominates the substitution effect, giving rise to an upward sloping demand curve. Okay, I hope you found this helpful.