a question related to inferior goods

[Ice_Blue]

what is the difference between "ordinary inferior goods" and "highly inferior goods i.e Giffen's goods"?Explain with examples.

(I hope any ICAP examiner is not reading this question.)

Regards,


Ice Blue

[derivativetrader]

In consumer theory, an inferior good is one for which demand decreases when income rises, unlike the more common normal goods, for which the opposite is observed. Inferiority, in this sense, is an observable fact rather than a statement about the quality of the good.

National bus service is an example of an inferior good. This form of transport is cheaper than air or rail travel, but more time-consuming. When money is constricted in comparison to time, bus services become more palatable, but when money is abundant and time, thus, worth more of it, more rapid transport is preferred.

A special type of inferior good may exist known as the Giffen good, which would disobey the "law of demand". This would have to be a good that is such a large proportion of a person or market's consumption that the income effect of a price increase would produce, effectively, more demand. The observed demand curve would slope upward, indicating negative elasticity.

DT



Edited by - derivativetrader on Dec 19 2004 042813 AM