Introduction
The term 'goods' is defined in economics as a commodity that fulfils human desires, i.e., something that offers utility to customers. In economics, various sorts of commodities are investigated, such as normal goods, inferior goods, luxury goods, Veblen goods, and Giffen goods. Giffen goods are goods for which demand rises as their price rises and vice versa.
In contrast, inferior goods are ones whose demand declines as the consumer's income rises. Because the revenue effect of Giffen products and Inferior goods is negative, both of them are frequently compared. So, hopefully, this essay has helped you comprehend the distinction between Giffen products and inferior commodities.
Giffen Goods vs Inferior Goods
Giffen goods and inferior goods are closely related in that Giffen goods are subsets of inferior goods. Both of these products do not follow the typical demand patterns given forth in economics and, as a result, are regarded differently by customers as market prices and income levels fluctuate. People are unlikely to buy more of a Giffen good even if costs are cheap since they are looking for better alternatives or will spend their money on anything else. People tend to spend less on lesser things when their income improves since they can now buy more expensive, higher-quality alternatives.
Difference Between Giffen Goods and Inferior Goods in Tabular Form
| BASIS OF COMPARISON | GIFFEN GOODS | INFERIOR GOODS |
| Meaning | These are the goods where demand increases even as the price of the commodity rises. | These are the goods whose demand decreases as consumer income rises. |
| Relation | The price of the commodity and demand for Giffen items are inextricably linked. | The consumer's income and demand for inferior items have an inverse connection. |
| Income Effect | Giffen items have a negative income effect. | Inadequate items have a negative income effect. |
| Substitution Effect | Giffen items have a positive substitution effect. | Inadequate goods have a positive substitution effect. |
| Price Effect | Giffen items have a negative pricing effect because the negative income effect outweighs the positive substitution effect. As a result, if the price falls, so will the demand. | Because the positive replacement effect for inferior items is larger than the negative income effect, the price effect is positive. As a result, when the price falls, so will the demand. |
| Law of Demand | Giffen Goods does not adhere to the Law of Supply and Demand. This means that when the price of the commodity rises, so will the demand for Giffen goods. | Inferior Goods may or may not be subject to the Law of Demand. It means that the price of inferior items and the quantity required may or may not have an inverse relationship. |
| Close Substitutes | No | Yes |
What Are Giffen Goods?
A Giffen good is a low-income, non-luxury item that contradicts conventional economic and consumer demand theories. Demand for Giffen items increases when prices rise and decreases when prices fall. This produces an upward-facing demand curve in econometrics, in contrast to the fundamental rules of demand, which produce a downward-sloping demand curve.
The term "Giffen goods" was first used in the late 1800s and is named after Sir Robert Giffen, a famous Scottish economist, statistician, and journalist. The Giffen goods concept focuses on low-income, non-luxury products with few close substitutes.
Giffen products are comparable to Veblen goods in that they challenge normal economic and consumer demand theory, but they focus on luxury items.
Bread, rice, and wheat are examples of Giffen products. These items are frequently necessities with few near-dimensional equivalents available at comparable prices.
Supply and Demand of Giffen Goods
Supply and demand rules control macroeconomic and microeconomic ideas. Economists discovered that as prices rise, demand reduces, resulting in a downward-sloping curve. When prices decline, it is expected that demand will rise, resulting in an upward-sloping curve. Income can help to minimize these effects by flattening curves because higher personal income can lead to alternative behaviors. Substitution and the substitution effect can be important as well. Because most things have replacements, the substitution impact helps to bolster the argument for standard supply and demand.
In the case of Giffen goods, the impact of income can be significant, while the substitution effect can also be significant. The demand curve for Giffen items is sloping upward, indicating that there is more demand at greater costs. Because there are few alternatives for Giffen items, people are still eager to buy them when the price rises. Giffen commodities are frequently needed items, incorporating either the income effect or a higher price replacement effect. Consumers are prepared to spend more on Giffen goods since they are important, but this also limits discretionary cash, making purchasing slightly higher options further out of reach. As a result, consumers purchase even more Giffen products. In general, both the income and substitution effects appear to work, resulting in unusual supply and demand outcomes.
Condition to Characterize Goods as Giffen Good
1. It must be a subpar product.
The first need for a good to be classified as a Giffen good is to have its consumption rise with a drop in budget. When a consumer's budget is limited, he or she will consume extra of a subpar product.
2. The amount spent on items should constitute a significant component of the budget.
For a considerable income effect to occur, the amount spent on such goods must constitute a significant part of the entire budget of consumers.
3. A scarcity of suitable replacements
To maintain/increase demand for Giffen commodities, even at inflated prices, one of the following should exist: -
- There will be no replacement goods or services.
- Substitute goods should be more expensive than the existing goods.
As a result, even after an increase in cost in the items, the existing good remains an appealing option, and buyers do not switch to another commodity.
What Are Inferior Goods?
Inferior goods are those whose quantity requested reduces as the consumer's income rises over a particular level, and vice versa. Simply put, the quantity desired by customers for such commodities has an indirect connection to the consumer's income, resulting in a negative income elasticity of demand.
Consumers and merchants are fully aware of the concept of inferior commodities, for example, millet is inferior to wheat, kerosene is inferior to cooking gas, bidi is inferior to cigarettes, and so on. As a result, such commodities have better quality alternatives (referred to as superior goods). When a consumer's income rises, he may afford higher-priced items over lower-priced ones.
Inferior Goods Example
There are numerous examples of subpar goods. Some of us might be more familiar with some of the everyday substandard things we encounter, such as quick noodles, hamburgers, canned goods, and frozen entrees. People tend to invest in this kind of thing when they have less money. However, as their incomes improve, they frequently trade things in for more expensive products.
Food
Food is a necessity that must always be purchased; hence groceries are among the most prominent examples of subpar products. However, the extent to which people consume food may vary. Instead of eating a steak for dinner, a person may select a lower-quality alternative such as canned meat or frozen cuisine.
Furthermore, the manner in which people consume food may be categorized differently. Individuals may be less inclined to eat out, particularly at pricier restaurants, in favor of less expensive means of food preparation, such as preparing a meal at home. One strategy is just a better replacement for the other.
Transportation/Travel
We can also use transit as an example of a subpar good. People with modest incomes may choose to take public transportation. When their salaries rise, individuals may abandon the bus in favor of cabs or even buy cars. Furthermore, purchasing a vehicle may be divided into tiers, with a used Honda being regarded as inferior to a new Tesla.
Many aspects of travel, in addition to regular transportation, may be deemed superior or inferior commodities. Evaluate the hotel you might stay at depending on your specific financial situation. You can also choose to attend various cultural activities or fly first class instead of taking cheaper, inferior travel options.
Brands
McDonald's coffee may be of lower quality than Starbucks coffee. When an individual's revenue falls, they may switch from their daily Starbucks drink to the less expensive McDonald's brew. When a consumer's income grows, they may trade in their McDonald's coffee for more costly Starbucks coffee.
No-name grocery stores products, such as cereal or peanut butter, are also instances of poor goods. As consumers' incomes are low, they may opt for cheaper generic brand products, and as their incomes rise, they may convert to name-brand products. Grocery store brand products demonstrate how inferior goods are not always of worse quality. Many of these items are from the same brand as the pricier items.
Groceries
Groceries are among the most common examples of subpar products. Food products in this group are less expensive than their regular goods equivalents, such as fresh vegetables and fresh meat, and they also last longer, making them a more cost-effective buy. Examples of specific examples include:
- Vegetables in cans
- Noodles in a flash
- Foods that have been frozen
- Meat in a can
Dining Options
Some believe fast food to be a lower-quality product, even though many consumers, regardless of income level, appreciate it. Fast food can sometimes be an inferior good alternative for the regular good equivalent of dining at a higher-end restaurant. Dining out at a restaurant is more costly and is usually reserved for individuals with a greater amount of disposable income.
Generic Brands
Another prominent low-quality example is generic brands. These items are frequently far less expensive than the products they replace, although they are typically created with the same components or at the exact same level. Generic items are sometimes created by brand-name corporations who provide them with a generic label to sell them at a reduced price.
Inferior Goods and Consumer Behaviour
Consumer behavior frequently dictates demand for inferior items. People with lesser incomes or when the economy is contracting typically drive demand for inferior items. However, this is not always the case. Some clients may refuse to modify their ways and continue to buy inferior goods.
Consider a consumer who receives a pay increase from their work. Despite their increased affluence, individuals may continue to purchase McDonald's coffee because they prefer it to Starbucks' brew, or they might discover a no-name supermarket product to be superior to its more expensive name-brand version. It's simply a matter of individual taste in this scenario.
In different places of the world, inferior items are not necessarily the same. For example, fast food may be considered an inferior good in the United States, while it may be considered a typical good for people in underdeveloped countries. A normal good is one where demand rises as people's earnings rise, indicating a positive price elasticity of demand.
Key Differences Between Giffen Goods and Inferior Goods in Points
The distinction between Giffen and inferior products can be clearly identified on the following grounds:
- Giffen goods are goods whose demand increases as their prices rise. Inferior goods are those whose demand falls as the consumer's income rises above a certain threshold.
- Giffen commodities contradict the rule of demand, while inferior products are a component of consumer products and services, which is a demand determinant.
- There are no comparable products to Giffen. Superior items, on the other hand, have superior alternatives.
- When prices decline, the overall cost effect in the instance of Giffen items is negative. In contrast, as prices decline, the price effect for lesser goods would be positive.
- The demand curve for Giffen goods slopes upward, but it slopes downward for lesser items.
Conclusion
At first glance, these two notions appear to be the same since they differ from the basic consumption pattern. As a result, when market prices and income levels fluctuate, consumers treat these items differently, yet as previously discussed, they are distinct. Because Giffen products are a form of inferior goods, all Giffen goods fall under inferior goods; however, the opposite is not possible.
