Giffen Goods

With particular set of conditions and circumstances in place, inferior goods for which demand increases as the price hikes and decreases with the fall in prices.

A good is considered inferior if its demand decreases with the increase in income to buy or technically saying substitute with better goods. Again, for a good to become inferior other related conditions and circumstances play a vital role.

The behavior of giffen goods is a rare exception to demand rule that dictates demand to contract if prices go up and expands if prices fall. Giffen goods behave because of income effect overpowering the substitution effect.

This can happen in situations where community is extremely poor and have limited substitution available against the available good.

Having little income at hands, individuals cannot afford to buy better goods as the prices for other better goods might have risen as well and adding to misery is that limited to no other alternative is available.

Therefore, individuals are stuck with one product alone and has to buy it even if the price increases and more of it as they can’t afford better goods because of smaller leftover income.

And if the prices fall, demand for giffen good fall as community has more leftover income and tries to buy better goods instead of buying more of inferior good.

Veblen good is another type that has similar behaviour as giffen good but for very different set of reasons.