Question

Differentiate between Giffen goods and inferior goods.

Answer 1

Aspect	Giffen Goods	Inferior Goods
Definition	Giffen goods are a special type of inferior good in which an increase in price leads to an increase in the quantity demanded, violating the basic law of demand.	Inferior goods are goods for which demand decreases as income increases, but they follow the basic law of demand (i.e., price and quantity demanded are inversely related).
Price-Demand Relationship	In the case of Giffen goods, an increase in price leads to an increase in quantity demanded.	For inferior goods, an increase in price leads to a decrease in quantity demanded, like most goods.
Income Effect	The negative income effect of a price increase is so strong that it outweighs the substitution effect, leading to higher demand even as the price rises.	The income effect leads to a decrease in demand as income increases because consumers switch to higher-quality alternatives.
Substitution Effect	The substitution effect is outweighed by the income effect, leading to a paradoxical increase in demand when the price rises.	The substitution effect typically leads to a decrease in demand when the price rises, as consumers substitute the good with cheaper alternatives.
Examples	An example of a Giffen good is a staple food, such as bread or rice, in a very low-income setting, where people may consume more of it as its price increases because they cannot afford better alternatives.	An example of an inferior good is instant noodles, where people buy less as their income increases, and they can afford more expensive or higher-quality food options.