Let’s use an example to explain the concept of a normal, inferior and giffen goods.
Take for example, you only live on 2 types of goods, Clubbing and Books. So you’ve won the lottery today and you got an additional $500 to spare. You would want to go partying tonight right? Bring all your friends and buy them drinks till every gets dead drunk and forget what happened the next morning. So, you increased your consumption of clubbing due to your increase in income. That’s exactly what a Normal Good is.
But what if I’m a nerd? Since I’ve got more money now, it’s a good opportunity for me to cut down on clubbing so that I can stay at home and study and probably save for the future or something. My income has increased but I’m consuming less of clubbing. So that becomes an inferior good.
Therefore, a good being a Normal or Inferior good doesn’t say anything about the quality of the good. It is based on individual preferences.
A giffen good is basically one which defies the law of demand. And the law of demand is simply when the price of a certain good decreases, the consumer buys more. If the price increases, the consumer buys less.
So an example of a giffen good can be an iPhone. No matter how poor or rich you are, you would want to buy an iPhone because it’s cool to have one or something.
Complements are a pair of goods that are purchased together hand in hand. Like a car and petrol, Xbox and TV, computer and monitor, etc. So they have to be used together.
Gross Substitutes are things like iPhone and HTC, butter and margarine, etc. The demand for each good works in the opposite direction.
There was once somebody told me that sugar and salt were gross substitutes.. you mean you can actually put salt in your tea?
At the end of this video, you should be able to:
Some important notes: