Giffen Paradox and its applicability to Income Demand

The Giffen Paradox is a phenomenon in which an increase in the price of a good leads to an increase in the quantity demanded of that good. This goes against the basic law of demand which states that the quantity demanded of a good decreases as the price increases. The paradox was first observed by Sir Robert Giffen, a Scottish economist.

Applicability to Income Demand

The Giffen Paradox is applicable to income demand, which refers to the relationship between the quantity demanded of a good and changes in income. In the case of a Giffen good, which is a product that has no close substitutes and is a significant portion of a consumer's budget, an increase in the price of the good leads to a decrease in the consumer's purchasing power. This, in turn, leads to a decrease in the quantity demanded of all goods except for the Giffen good.

In the case of a Giffen good, the income effect dominates the substitution effect, which is the tendency of consumers to switch to substitute goods when the price of a good increases. As a result, an increase in the price of the Giffen good leads to an increase in the quantity demanded of the good, as consumers are forced to allocate more of their income to the good.

Conclusion

In conclusion, the Giffen Paradox is applicable to income demand, and describes a situation where an increase in the price of a Giffen good leads to an increase in the quantity demanded of the good. This paradox is important in understanding consumer behavior and the relationship between price and demand.