If the income effect is stronger than the substitution effect, the demand for the good would be positively related to its price. Such a good is called?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Giffen Good.
When the price of a good falls, the quantity demanded changes for two separate reasons:
Substitution effect: the good is now cheaper relative to other goods, so the consumer buys more of it.
Income effect: the lower price raises the consumer’s purchasing power. For a normal good this also means buying more; for an inferior good it means buying less, so the income effect pulls against the substitution effect.
For most inferior goods the substitution effect is still the stronger one, and demand falls as the price rises. When the income effect is stronger than the substitution effect, demand moves in the same direction as price, and the good is a Giffen good.
Why the other options are incorrect
Option (2) Luxury Good. — Incorrect. A luxury good is a normal good whose demand rises more than in proportion to income. For a normal good the two effects work in the same direction, so its demand still falls when its price rises.
Option (3) Industrial Good. — Incorrect. This describes who buys a good (firms, for use in production), not how its demand responds to price, so it has nothing to do with the two effects.
Option (4) Inferior Good. — Incorrect. The income effect of an inferior good works against the substitution effect, but the good becomes a Giffen good only when that income effect is the stronger one: every Giffen good is inferior, but not every inferior good is a Giffen good.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 12-05 S1 31-05 S1* | – | – | 02-06 S3* 13-06 S1* | – |
* A similar question.
NCERT (2025-26): “2.4.3 Normal and Inferior Goods … The demand function is a relation between the consumer’s demand for a good and its price when other things are given. Instead of studying the relation between the demand for a good and its price, we can also study the relation between the consumer’s demand for the good and the income of the consumer. The quantity of a good that the consumer demands can increase or decrease with the rise in income depending on the nature of the good. For most goods, the quantity that a consumer chooses, increases as the consumer’s income increases and decreases as the consumer’s income decreases. Such goods are called normal goods. Thus, a consumer’s demand for a normal good moves in the same direction as the income of the consumer. However, there are some goods the demands for which move in the opposite direction of the income of the consumer. Such goods are called inferior goods.… A rise in the purchasing power (income) of the consumer can sometimes induce the consumer to reduce the consumption of a good. In such a case, the substitution effect and the income effect will work in opposite directions. The demand for such a good can be inversely or positively related to its price depending on the relative strengths of these two opposing effects. If the substitution effect is stronger than the income effect, the demand for the good and the price of the good would still be inversely related. However, if the income effect is stronger than the substitution effect, the demand for the good would be positively related to its price. Such a good is called a Giffen good.” |