Question

Explain Giffen goods and Veblen goods and their similarities and differences in terms of price and income elasticity of demand.

Answer 1

Giffen good refers to the products whose consumption rises as the prices of the product goes up violating the law of demand. A product becomes Giffen good when the consumers are poor and there are limited substitutes for the product. Giffen goods are special type of inferior goods without any substitutes on which low-income households rely reversing the law of price and demand. For eg. people having lower income spend most of their earnings on their basic necessities like food, shelter, clothes etc. Once the price of food products like rice, wheat go up, people would spend more to sustain their lives cutting their other expenditures due to unavailability of other substitutes for their staple foods.

Veblen good refers to the luxury products for which demand increases with the increase in price of the product due to their appeal as status symbol. For eg. higher class people spend huge amount of money buying antique paintings, diamonds, luxurious cars etc though the prices of these products go up.

The main similarity between Giffin good and Veblen good is that they both defy the law of demand. The law of demand states that the demand for a product will go down with the increase in price of the product or vice versa. But in this case, the reverse case applies where the consumption of products go up with the increase in price of products.

On the other hand, there are many differences between Giffen good and Veblen good which are stated below-

a) Giffen goods are inferior goods while Veblen goods are high quality, coveted products.

b) Giffen goods are related to poor while Veblen goods are related to rich.

c) Giffen goods happen to consumers who struggle to manage their daily sustenance while Veblen goods are enjoyed by affluent people as a mark to status symbol.

d) There is very limited price difference when the price increase happen in Giffen good but price of a product could go up for infinite in Veblen good.