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Unformatted text preview: come effect : ? depending on whether
normal or inferior good
– As price goes up, real income reduces.
– If a normal good, the demand reduces: negative
normal good, the demand reduces negative
– If an inferior good, the demand increases: positive
Inferior decrease when Income increase is because
when people have more purchasing power, they tend to
Upgrade them self to normal good from Inferior, e.g. normal
good in this case will be branded 22 • Inferior good case (price increase)
(p C B Inc. A U0 Sub.
Total xCV x1 U1
x0 I / P
1 I’ / P1 I0 / P0 Good x 23 Basketball, Ti ckets per year Giffen
• L2 – …the income effect is larger and
negative (since this is an inferior
good). e2 L1 Even though the substitution
though the substitution
effect is positive…. I2 L*
e1 e* Total effect Substitution effect I1
Movies, Tickets per year Income effect
Giffen Good (Cont.)
• Empirical evidence: potato in Ireland during famine
• More recent studies dispute it. Still debatable.
• Some individuals did exhibit the Giffen phenomenon
in certain income range.
in a certain income range.
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