explain why all giffen goods are inferior goods but not all inferior goods are g

Question

explain why all giffen goods are inferior goods but not all inferior goods are giffen goods explain why all giffen goods are inferior goods but not all inferior goods are giffen goods

Explanation / Answer

An Inferior Good is any good which is not a Normal Good. It therefore includes all Giffen goods. However, while all Giffen goods are Inferior goods, not all Inferior goods are Giffen goods. The classic textbook example of an Inferior good is a remould tyre which has a negative income effect. This means that less of them will tend to be bought when income rises A Giffen good is defined as dx/dp > 0 (i.e. quantity demanded increases with own-price). An inferior good is defined as dx/dm < 0 (i.e. quantity demanded decreases with income). The own-price Slutsky equation tells that: dx/dp = dh/dp - x(dx/dm) (own-price elasticity of demand = substitution effect - income effect), where h is the Hicksian demand. dh/dp is always negative. If the good is Giffen, then the left hand side of the Slutsky equation is positive. Since dh/dp is negative, then it must be the case that dx/dm is negative (i.e. the good is inferior), since otherwise a positive income effect subtracted from the substitution effect would give a negative result. Therefore, all Giffen goods are inferior goods. Yet, it may be the case that x(dx/dm) is negative, an inferior good, but that the income effect is lesser than the substitution effect, so that the left hand side of the equation remains negative. Thus, not all inferior goods are Giffen.

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