Question

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Write a short note on Giffen paradox​

Answer 1

Answer:

The Giffen Paradox is an exception to the law of demand which states an indirect relationship with price and demand as well as a direct relationship with income and demand. (When income increases, demand for a commodity also increases.) Giffen goods are nothing but inferior goods.

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Answer 2

The Giffen Paradox is an exception to the law of demand which states an indirect relationship with price and demand as well as a direct relationship with income and demand. (When income increases, demand for a commodity also increases.)

Giffen goods are nothing but inferior goods.

Now, demand for a product is a function of its price:

Qx = f(P)x

Where Qx is the quantity demanded and Px is the price of the product.

Giffen paradox consists of those scenarios that violate the above mentioned law.

Let's take an example of luxury goods like cars.

An increase in the income of the buyer would result in a perceived decrease in the price of a cheap car for the prospective buyer. He would, now that he can afford it, prefer to go for a comparatively expensive car rather than the cheap car although the latter costs less than the former. Here, the cheap car is an inferior good, not in terms of quality but in terms of perception. Here, the quality of life, expected to improve on acquisition of a superior quality item, is given preference rather than quality of good when making a purchase decision.