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Overview

Normal goods vs inferior goods

As you get richer, you increase your purchases of certain goods that you’ve always liked and can now afford to buy in larger quantities. These goods are called normal goods.

On the other hand, you decrease your purchases of things that you were buying only because you were too poor to get what you really wanted. These goods are called inferior goods.

Example

For example, new cars are normal goods, whereas really old, poorly running used cars are inferior goods. Similarly, freshly made organic salads are normal goods, whereas three-day-old discounted bread is an inferior good

Giffen goods

In the nineteenth century, Robert Giffen noticed that for certain basic commodities, such as bread and potatoes, demand appeared to go up when prices rose.

Example

Imagine a family on very low incomes with a diet of potatoes and meat. When the price of potatoes goes up — but is still well below that of meat — the family's response is to cut out some of the meat and replace it with a larger quantity of potatoes. Higher prices mean more, not less, demand.

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Normal, inferior and Giffen goods

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