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Principles of Economics- Mankiw (5th) 465

Principles of Economics- Mankiw (5th) 465 - CHAPTER 21 THE...

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CHAPTER 21 THE THEORY OF CONSUMER CHOICE 479 Notice that a rise in the price of potatoes has led the consumer to buy a larger quantity of potatoes. Why is the consumer responding in a seemingly perverse way? The reason is that potatoes here are a strongly inferior good. When the price of potatoes rises, the consumer is poorer. The income effect makes the consumer want to buy less meat and more potatoes. At the same time, because the potatoes have become more expensive relative to meat, the substitution effect makes the consumer want to buy more meat and less potatoes. In this particular case, however, the income ef- fect is so strong that it exceeds the substitution effect. In the end, the consumer re- sponds to the higher price of potatoes by buying less meat and more potatoes. Economists use the term Giffen good to describe a good that violates the law of demand. (The term is named for economist Robert Giffen, who first noted this possibility.) In this example, potatoes are a Giffen good. Giffen goods are inferior
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