Question

10. Evaluate and show graphically your responses for the following statements when the Price of X increases, then

1. If X is Giffen, then it must be inferior, but if a good is inferior it doesn’t have to be Giffen.
2. If X is inferior, the demand for X cannot be elastic.

Provide a graphical proof for your explanation.

Answer 1

1. All Giffen’s goods are categorized as inferior or low quality goods , but the same does not stand for all inferior goods. A good is categorized as inferior especially when compared with income level. A bus journey may seem inferior to a cab drive for a person who earns a high living.

In such cases as a Giffen’s good, a price rise will mean that the real income of the consumer falls, the poor consumers who are forced to consume such inferior goods will reduce their consumption of other items to spend more on the given good, since Giffen’s goods are those on which the consumer spends a large part of his income. In the diagram below, the upward sloping demand curve DD is the demand curve for Giffen’s good, it is an exception to the generally negatively sloped demand curve since it has a positive slope. As the price rises from P to P₁ it results in a rise in quantity from Q to Q₁. This so because such goods have a positive price effect and are an exception to the law of demand.

2. If x is inferior , it will have inelastic demand because such commodities have fewer substitutes. In the given diagram, IN is the demand curve for inferior goods, a rise in price from P to P₁ causes the inferior good causes a lesser or very minimal fall in quantity demanded, Such goods have less substitutes and have a positive income effect, note that we have taken ‘income’ as the variable on the Y-axis to show that they are generally related to income levels of the consumer, higher the income lower will be the quantity demanded for such goods. Hence such goods have a negative income effect.