Normal good, inferior good, Giffen good

“For example, the supporters of tariffs treat it as self-evident that the creation of jobs is a desirable end, in and of itself, regardless of what the persons employed do. That is clearly wrong. If all we want are jobs, we can create any number–for example, have people dig holes and then fill them up again, or perform other useless tasks. Work is sometimes its own reward. Mostly, however, it is the price we pay to get the things we want. Our real objective is not just jobs but productive jobs–jobs that will mean more goods and services to consume.”

Milton Friedman

 

Knowing about goods is a good idea.

Usually, goods are categorized into three different groups, which are: normal goods, inferior goods and Giffen goods.

Normal good is a good which the demand for it will increase as a consumer achieves a higher income. A lot of goods that you consume everyday are normal goods, such as clothes, furniture and etc.

Keep in mind that, according to the microeconomic theory by MWG: “The assumption of normal demand makes sense if commodities are large aggregates (e.g., food, shelter). But if they are very disaggregated (e.g., particular kinds of shoes), then because of substitution to higher-quality goods as wealth increases, goods that become inferior at some level of wealth may be the rule rather than the exception.

Inferior good is a good for which the demand decreases as the consumer earns more of an income. That means that, the demand for such goods decreases when the consumer has the opportunity of purchasing other goods with better quality. A great example of an inferior good is second hand clothes.

The word inferior does not refer to the quality of such goods, but points out to the fact that such goods are affordable for consumers at lower levels of income.

Giffen goods are similar to inferior goods in that the demand for both decreases, but for Giffen goods this happens when the price of the good itself falls.

Again, according to MWG, “Low-quality goods may well be Giffen goods for consumers with low wealth levels. For example, imagine that a poor consumer initially is fulfilling much of his dietary requirements with potatoes because they are a low-cost way to avoid hunger. If the price of potatoes falls, he can then afford to buy other, more desirable foods that also keep him from being hungry. His consumption of potatoes may well fall as a result. Note that the mechanism that leads to potatoes being a Giffen good in this story involves a wealth consideration: When the price of potatoes falls, the consumer is effectively wealthier (he can afford to purchase more generally), and so he buys fewer potatoes.

 

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Refrence

 Mas-Colell, Andreu, Whinston, Michael D., Green, Jerry R. Microeconomic Theory, Oxford University Press Inc, 1995