Question

differ giffen goods and inferior goods?Briefly explain in simple launguage?

Answer 1

Inferior good is a good whose demand increases when the consumer's income decreases and whose demand decreases as the consumer's income increases. For example, secondhand cars are cheaper. If my income is low, I would buy a secondhand car, and as my income rises, I would prefer a brand new car that I can afford. So, inferiority, in a sense, refers to the easy affordability of the good at lower consumer income, compared to the costly substitute.

Giffen good is a special type of inferior good whose demand increases as the price of the good increases (effective consumer income decreases due to price increase). An example could be rice which is a staple food of a region and majority of the food consumption is rice that cannot be substituted. What will happen? Even if the price of rice increases, there is no substitute for rice in the food basket, so its demand does not fall. This disobeys the fundamental law of demand, i.e. demand decreases as price increases. 

The difference between the two is that while all giffen goods are inferior, all inferior goods are not necessarily giffen. Inferior goods ought to have a costly substitute. On the other hand, for a good to be giffen, it should not only be inferior but also:

Lack close substitute goods.

A major share of consumption (or consumer's income).