Inferior Goods vs Giffen Goods: Definition, Price Response, Income and Commonality

What are Inferior Goods and Giffen Goods?

Inferior goods are those for which demand decreases as income increases, whereas Giffen goods are rare goods for which demand increases as price increases, contradicting the law of demand.

Introduction to Inferior Goods and Giffen Goods

Inferior Goods vs Giffen Goods: Knowing the difference between Inferior Goods and Giffen Goods in law and economics can help us describe different types of goods and how consumers respond to price changes.

Understanding the difference between inferior goods and Giffen goods can help consumers make more informed purchasing decisions and provide insights for businesses into what drives consumer behaviour.

What are Inferior Goods?

Inferior goods are goods that consumers will buy less of as their income increases. For example, suppose a consumer’s income rises. In that case, they may switch from eating generic cereal to a more premium brand, decreasing the consumption of the generic brand.

Inferior goods are typically low-quality, lower-priced items that are not considered luxury goods. Examples include generic food brands, used cars, and budget-friendly clothing brands.

When a consumer’s income increases, they are more likely to upgrade to higher-quality, more expensive products, decreasing the consumption of inferior goods.

What are Giffen Goods?

On the other hand, Giffen goods are a type of good for which an increase in price leads to an increase in demand. This contradicts the law of demand, which states that demand decreases as price increases.

Scottish economist Sir Robert Giffen first introduced the concept of Giffen goods in the 19th century.

He observed that when the price of bread increased in Ireland, the poor consumers he studied did not reduce their consumption of bread, as would be expected under the law of demand. Instead, they increased their consumption, as they could no longer afford to eat more expensive food items like meat.

In this scenario, bread became a Giffen good, as it was the only affordable food option for these consumers, and a price increase led to increased demand.

However, Giffen goods are rare and have only been observed in specific circumstances, such as during extreme poverty or famine.

Inferior Goods vs Giffen Goods

What are Non-Giffen Goods?

Non-Giffen goods refer to all goods that do not exhibit the unique Giffen behaviour. For most goods, as prices rise, the quantity demanded falls, and vice versa, consistent with the law of demand. Giffen goods defy this, with demand rising as prices increase.

Non-Giffen goods, therefore, either conform to the standard law of demand or may remain unaffected by price changes, as in the case of perfectly inelastic goods. They encompasses both normal goods, where demand rises as consumer income increases, and inferior goods, where demand falls with rising income but without displaying the Giffen paradox of increasing demand with price.

Giffen goods are a rare and controversial concept in economics, as they challenge some fundamental assumptions of the field. While they are not commonly observed in real-world markets, they are theoretically possible.

On the other hand, fake goods are counterfeit or imitation products that are sold as if they are genuine. These products are illegal and are intended to deceive consumers by imitating the appearance or branding of legitimate products.

So, Giffen goods and fake goods are two completely different concepts that do not directly relate to each other.

Accordingly, the demand for inferior goods is inversely related to income, and the demand for inferior goods has a negative income elasticity.

However, Giffen goods have a positive price elasticity of demand, which means they have a higher price effect than their negative substitution effect. As their price increases, so does the demand for their goods.

As the price of the Giffen good increases, consumers switch from substituting it for the substitute good, resulting in increased demand for the Giffen good. This is contrary to the law of demand.

Marketing campaigns can also be used to educate consumers about the benefits of using inferior goods, such as lower prices or environmental sustainability, to increase their demand.

As a result of marketing strategies, Giffen goods can be perceived as scarce or exclusive, increasing demand. Advertising can also be used to differentiate Giffen goods from substitutes and highlight their unique characteristics, which can increase demand for them.

Conversely, a decrease in the availability of credit may result in an increase in the demand for inferior goods, as consumers may have less disposable income to spend on expensive alternatives.

Availability of credit may not have a major impact on Giffen goods’ demand, because their unique characteristics and the positive price effect that drives their demand may not be affected by changes in credit availability.

Meanwhile, Giffen goods increase their marginal utility as the price of the good increases, as consumers switch from substitute goods to Giffen goods, resulting in an increase in demand for them.

Therefore, the marginal utility of inferior goods and Giffen goods varies differently with changes in income and price, respectively.

Because the price decreases and the profit margin shrinks, however, the producer surplus decreases.

Conversely, for Giffen goods, as the price of the good increases, the consumer surplus increases, as consumers switch from substitute goods to the Giffen good, increasing its demand.

As a result, the producer surplus increases, as the price rises and the profit margin increases. Thus, changes in price may have different effects on consumer and producer surpluses.

Conclusion: Inferior Goods vs Giffen Goods

Inferior goods and Giffen goods are two types of goods that respond differently to changes in price.

Inferior goods are typically lower-priced, lower-quality items that consumers will buy less of as their income increases. In contrast, Giffen goods are goods for which an increase in price leads to an increase in demand.