Normal and Inferior Goods

For normal goods, the substitution and the income effects reinforce one another to cause the demand curve to be negatively sloped.

For inferior goods, an increase in income causes consumers to buy less, not more.

In theory, it is possible for the income effect to be so strong and so negative as to overpower the substitution effect.

In such a case, more of a good would be consumed as the price rises and less would be consumed as the price falls. These goods are called Giffen goods.

Veblen goods are goods that derive their value from the consumption of them as symbols of the purchaser’s high status in society.

[Practice Problems] For a Giffen good, the:

A. demand curve is positively sloped.

B. substitution effect overwhelms the income effect.

C. income and substitution effects are in the same direction.

[Solutions] A

The income effect overwhelms the substitution effect such that an increase in the price of the good results in greater demand for the good, resulting in a positively sloped demand curve.