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CSEET · Economic and Business Environment · Basics of Demand and Supply and Forms of Market Competition

A Giffen good is an exception to the law of demand mainly because:

A Giffen good is an inferior good whose strong negative income effect outweighs the substitution effect. When its price rises, the poor consumer buys more of it because they can no longer afford better alternatives, so the demand curve slopes upward.

  1. AIt is an inferior good with a strong negative income effect that outweighs its substitution effectCorrect
  2. BIt is a luxury bought to display wealth, so a higher price raises its prestige
  3. CConsumers expect its price to rise further in future
  4. DIts supply is fixed and cannot respond to price

Explanation

For a Giffen good, a price rise makes the poor consumer poorer, so he cuts back on better foods and buys more of the staple. The negative income effect outweighs the substitution effect, so quantity demanded rises with price. Prestige-driven demand describes a Veblen good, not a Giffen good.

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