What is meant by Giffen's Paradox? Explain with suitable example.
Giffen Goods -
Ordinarily we find inverse relationship between price and quantity demanded i.e. when price increases, quantity demanded goes down and vice versa. But in some cases, this does not happen. Even if a reduction in price takes place, the quantity demanded goes down instead of increasing. This can also be called an exception to law of demand. This is called Giffen's Paradox, named after Sir Robert Giffen who first discovered this phenomenon.
The phenomenon of Giffen paradox can be explained with the following example.
Suppose a person needs 10 kg. of foodgrains for his monthly requirement of food and he has only $70 to spend on foodgrăins.
The price of wheat is $10 per kg and
The price of oats is $5 per kg.
His present consumption and expenditure on the wheat and oats is a follows;
If the price of oats falls to $4, then for getting 10 kg of foodgrains for $70, he can modify his consumption as follows;
We, thus, find that a reduction in the price of oats reduces its consumption and the money so saved is used to consume more of wheat. It is a Giffen's Paradox.
Ordinarily we find inverse relationship between price and quantity demanded i.e. when price increases, quantity demanded goes down and vice versa.