Economics • Economic BasicsMedium
What does the 'Giffen Good' paradox demonstrate about the law of demand?
A. Demand increases as price increases, violating the law of demand due to a dominant income effect✓ Correct Answer
B. Demand remains completely unresponsive to any changes in price
C. Demand decreases as consumer income increases, classifying it as an inferior good with weak substitution effect
D. Demand rises strictly because of conspicuous consumption and social status
💡 Solution & Explanation
A Giffen good represents a rare exception to the standard law of demand, where an increase in its price leads to an increase in quantity demanded because the negative income effect outweighs the substitution effect. Unlike normal or luxury goods, inferior Giffen goods make up a large portion of a consumer's budget, forcing them to drop superior alternatives when prices rise. This economic anomaly was first observed by economist Robert Giffen regarding staple foods like bread during famine conditions.
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