Question

What is an inferior good? Explain your answer with examples. Can be a Giffen good ever have positive income elasticity of demand?

Answer 1

An inferior good is a good whose demand decreases when consumer income increases and vice versa. Lets take an example if a person is having a low income he may buy cheap quality of rice. But, when his income rises he can afford better quality of rice, so he will buy them (i.e. good quality of rice).

Giffen good is a type of good, its demand rises even when its price increasing. Lets consider an example, there are people who spend most of their income on potatoes, leaving a small proportion of their income to purchase meat ,a source of protein and a relative luxury. But when the price of potatoes rises, the income effect of this price change was immense. Real incomes fell dramatically and to its reaction the people decides to stop buying the relative luxury, meat, all together, as their real incomes had fallen so much, and to spend all of their income on the one good without which they cannot survive i.e. potatoes. So the result of the large rise in the price of potatoes was an increase in demand for potatoes and this shows the positive income elasticity of demand.