🔎 Giffen vs Inferior

“Not Giffen” = “Downward Sloping Demand Curve” ↓

“Giffen” = “Upward Sloping Demand Curve” ↓

Here’s an alternative version of the diagram↓. Which do you prefer?

✏️ Suppose that there is a downward sloping demand curve for Maruchan ramen noodles (an inferior good) and that their price rises due to a tariff. Which is stronger, IE or SE? Is this a Giffen good?

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Because of the downward sloping demand curve, it isn’t Giffen. SE is stronger. For inferior but not giffen, SE > IE.

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✏️ Suppose that the price rises on good X, an inferior good, and people buy more of it. Is it a Giffen good?

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If, when the price rises, you buy more of it, the demand curve must be upwad sloping sloping, so Giffen.

Inferior: Poorer more If it were normal, you’d by less

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✏️ Suppose that the price falls on a good X and you buy more of it (CE). Is it a Giffen good?

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No. Downward sloping.

Note that the above could happen with an inferior good.

• P↓, so PP↑ (you feel richer). It is inferior, and when you feel richer, you buy less of inferior goods, so IE↓.
• Because the price of the good goes down, you will naturally substitute toward that good (SE↑)
• We don’t know if IE > SE, or SE>IE, but it might be that SE>IE. Let’s explore that case, where SE>IE.
• To summarize, IE↓, SE↑, but SE>IE (we assume). If SE is stronger, then CE↑.
• This illustrates how it is possible for this to be an inferior good.  ✅