Income and Substitution Effects with Normal and Inferior Goods

Income and - the general public will prefer lower prices Another possible case that could cause a Giffen good is the case in which a good is

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Income and Substitution Effects with Normal and Inferior Goods Another exception is the case where an increase in price causes an increase in demand. This results in an upward-sloping demand curve, and the good is called a Giffen good. Giffen goods are theoretically possible, but very improbable, since it is unlikely that an increase in price causes increase in demand. One possible justification for a Giffen good is that people associate higher prices with status, luxury, and quality, so that a higher price might increase the perceived value of a good. In reality, however, this effect is outweighed by the overwhelming tendency to prefer lower prices: even if a few people prefer the added cachet of a high-priced luxury good,
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Unformatted text preview: the general public will prefer lower prices. Another possible case that could cause a Giffen good is the case in which a good is inferior and the income effect outweighs the substitution effect. To illustrate, assume that ACME Cola is an inferior good. When it's price increases, the income effect makes Calvin feel poorer. If the income effect is very strong, and the substitution effect is very weak, then Calvin will buy more ACME Cola, because the consumption of inferior goods increases with decreases in income. This, too, is unlikely, however, because the substitution effect is almost always stronger than the income effect. Demand Curve for a Giffen Good...
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This note was uploaded on 02/09/2012 for the course ECO ECO2013 taught by Professor Jominy during the Fall '08 term at Broward College.

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