Question

2. Explain Giffen goods and Veblen goods and their similarities and differences in terms of price and income elasticity of demand.
1500 words

Answer 1

Solution:

Giffen Goods

Generally for any good,it's demand reduces as the price increases.This is called the law of demand in microeconomics.But in case of some goods this law is violated.Those goods are called Giffen Goods.So the consumption of these giffen goods rises as the prices rises and vice versa.

Example:Take the case of wheat.It is a Giffen good because it's demand increases as price increases.This is because as it's price increases,the consumers are left out with comparitively lesser money to purchase other expensive items which they would consume.So they up buying more of wheat (since here eventhothough it's price increased but still it continues to be cheaper in comparision to other expensive goods).There are 3 conditions to be satisfied inorder for a good to be classified as a giffen good: a).It should be an inferio good; b).There should not be any substitute for it ; c).they should make up substantial percentage in the buyer's income but not so high percentage that the other normal goods cannot be consumed.

Veblen Goods

These goods are similar to Giffen goods in the sense,follow the same principle as Giffen goods (i.e.,their demand increases as their price increases).But the reason for which they show this behaviour is the differentiating factor between the two.They have an upward sloping demand curve because they are of high quality and coveted products.

Example: (Say)" Michael Kors " purses.They are of premium quality and are costly.So that is the reason why many people desire to posess them.

Difference between Giffen and Veblen Goods

1. A giffen good is an inferior good and does not have any easily available substitutes whereas a Veblen good is a high quality,highly desirable good

2.Higher demand for a Giffen good is due to increase in price but in case of a Veblen good, it is due to the consumer taste and preferences.

3.As the income of consumers increase,the demand for Veblen goods increase but in case of Giffen goods,the demand will not increase as the consumers will now have more money to spend,so they have a choice now to spend comparitively higher amount on the other goods which are priced higher than these goods.

4.Even though the income levels of consumers reduce,the demand will not reduce for Veblen goods whereas the demand for giffen goods increase since consumers will not be having enough money to purchase comparitively expensive goods.

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