204 Normal, Inferior and Giffen Goods & Complements and Gross Substitutes

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:

  • Mark out point B on the new budget constraint to identify a normal, inferior or giffen good.
  • Mark out point B on the new budget constraint to show complements or substitutes.

Some important notes:

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Author: admin

16 Comments

  1. Dayvid says:

    for the identification of compliment/gross sub. in yr case the change of price is decrease in price of X. hence the top part is compliments and the btm is gross substitute. can i safely say that if it is increase of price of X, the top part is actually Gross sub and btm is compliment?

  2. Thin says:

    Hi. Can I ask if the price of x increase will normal and inferior good be the opposite direction when compared to a fall in price of x?

    • Quickienomics says:

      Hello, Yes it will be in the opposite direction and the reason should be because real income has fallen. So if we move to the right side of point C, we are buying more of good X, and if we’re buying more of good X when our real income has dropped, then it is definitely an inferior good. Great question! 🙂

  3. bhawna says:

    sir,
    you said in the previous vid that slustky substitution is > than hickson subs effect but n this video its the opposite ?

    • Quickienomics says:

      Hi Bhawna,

      The size of the substitution effect is determined by where I draw the indifference curve on the slutsky imaginary budget line. Therefore, I can make it either smaller or bigger than the Hicksian S.E. Hope that helps.

      • Andy says:

        Hi, just a follow up question…..

        So what determines the position of Cs then? How do we know if it should be to the left or right of C_h. Clearly the relative size of the substitution effect (and income effect) will be different in both cases, isn’t it?

  4. Marek says:

    Hi, great blog, finding it very useful!

    One Question:
    If we are determining whether a good is inferior or normal under Slutsky – we will use the Slutsky’s point C as the middle point – no? In your video in the last example, it was slightly confusing, as you had both C_h and C_s and you drew the vertical line through C_h? Just wondering if you could clear that up.

    Thanks

    • Quickienomics says:

      Hi Marek,
      The vertical line is still on Ch to determine whether a good is normal or inferior. 🙂

  5. Siddharth says:

    Sir, one of the major issues that im facing is that even after i understand the theory (or atleast i think i do), im unable to twist it and fit it according to the need of the question. Basically, what i mean is that im unable to solve questions 😛
    So, would it be possible for you to make a video for possible examination questions, one of a kind maybe, and post it on the blog?
    Im sure it’ll be a great help for everyone.

  6. I have a question.
    Assuming that there are only 2 goods, can they be complements if one of them is inferior?

  7. Adeep Pais says:

    Can the new point of consumption i.e B, be located on new budget line, below/above the point of intersection with the IC U0 ? If no, y? if yes… no explanation need 🙂
    Thanks

  8. Adeep Pais says:

    Don’t answer, it can be located on those points, realized when I drew the graph for a increase in price of x.. thanks for this website…. really helps gets the loose points understood…

  9. Ang says:

    Hi, can you please compare the difference in the substitution effect and income effect when comparing the slutskian vs hicksian approach? Thanks.