Answer to Question #317029 in Microeconomics for Minister Felix

Question

Diagram to explain why all giffen goods are inferior but not all inferior goods are giffen good

Answer 1

inferior good are the goods whose demand falls as the income of the consumer increases.on the other hand giffen goods are those goods whose demand increases with the increase of prices and therefore the law of demand doesnt hold on them.

when the price of a good changes , the effect on the quantity demanded would be accumulative results of the above effects.substitution effect says,a person would substitute consumption of a good in favor of a good which has become cheaper.therefore ,substitution effect is always negative.income effect describes the the change of purchasing power of a consumer due to price change and it can be positive or negative.

an inferior good is one whose income effect is positive and hence increase in purchasing power caused by fall in price would reduce the consumption of that good but the law of demand still holds due to substitution effect outweighting income effect.for a good to be a giffen good,the positive income good should outweigh negative substitution effect to actually violate the law of demand .Hence that is the reason we refer to all giffen goods but not all all inferior goods are giffen.