all three demand curves. For all three goods, a price reduction to
creates a substitution effect that increases quantity demanded to
For normal goods in part (i), the reduction in price increases real income
and leads to a further increase in quantity demanded. The income effect is
shown as the increase from to The total effect of the price change
is therefore the change from to and point B is on the negatively
sloped demand curve.
For inferior goods, the price reduction causes an increase in real income
that leads to a reduction in quantity demanded. If the good makes up a
small fraction of the consumer’s total expenditure, which is the case for
most goods, then this income effect will be small. In part (ii), the income
effect reduces quantity demanded from to and so the total effect of
the price change is the change from to In this case, the income
effect does not fully offset the substitution effect, and so the demand
curve is still negatively sloped through point B. In part (iii), the income
effect is very large, reducing quantity demanded from to and the
overall change is therefore a reduction in quantity demanded from
In this case the demand curve is positively sloped through point
This is the case of the (rarely observed) Giffen good.
Giffen Goods
Great interest was generated by the English economist Sir Robert Giffen
(1837–1910) when he claimed to observe a situation with an upward
sloping demand curve. He observed that when the price of bread
increased (due to an increase in the price of imported wheat), members of
the British working class increased their consumption of bread.
As described in Figure 6-3 , products with positively sloped demand
curves are known as Giffen goods and they have two key
characteristics. First, the good must be an inferior good, meaning that a
p 1
QS 0.QS 0 Q 1.
Q 0 Q 1QS 0 Q 1
Q 0 Q 1.QS 0 Q 1 ,
Q
Q 1.