Practicing Success

Target Exam

CUET

Subject

Economics

Chapter

Micro Economics: Theory of Consumer behaviour

Question:

In case of which goods income effect is negative and stronger than the substitution effect of a change in price?

Options:

normal goods

luxury good

giffen goods

basic goods

Correct Answer:

giffen goods

Explanation:

Giffen goods are highly inferior goods, the demand for these types of goods decreases when there is increase in the income. 

Income effect refers to the change in demand of the commodity due to change in income. It is positive when both move in same direction i.e. increase in income cause an increase in the demand, seen in the case of normal goods. Income effect is said to be negative in the case of inferior goods as the demand for the commodity decreases when income increases. For example: increase in income causes an individual to switch to a commodity with higher quality. 

Substitution effect refers to the switching of an individual from one commodity to other because of cheap prices of the goods.

Now, in case of giffen goods the income effect is stronger than the substitution effect which leads to decrease in the consumption of the good when the income of the individual rises.