why there is positive relationship between griffen goods and price ?

Price-Demand Relationship: Giffen Goods or Giffen Paradox:

There is a third possibility. This is that there may be some inferior goods for which the negative income effect is strong or large enough to outweigh the substitution effect. In this case, quantity purchased of the good will fall as its price falls and quantity purchased of the good will rise as its price rises. In other words, in this case quantity purchased or demanded will vary directly with price.

Now, the income effect can be substantial only when the consumer is spending a very large proportion of his income on the good in question so that when price of the good falls, a good amount of income is released. If that good happens to be inferior good, the income effect will be negative as well as strong and may outweigh the substitution effect so that with the fall in price, the consumer will buy less of the good.

Such an inferior good in which case the consumer reduces its consumption when its price falls and increases its consumption when its price rises is called a Giffen good named after the British statistician, Sir Robert Giffen, who in the mid- nineteenth century is said to have claimed that when price of cheap common foodstuff like bread went up the people bought and consumed more bread.

A rise in the price of bread caused such a large decline in the purchasing power of the poor people that they were forced to cut down the consumption of meat and other more expensive food. Since bread even when its price was higher than before was still the cheapest food article, people consumed more of it and not less when its price went up. Similarly, when price of an inferior good, on which people spend a large proportion of their income, falls people will purchase less than before.

This is because the fall in price of an inferior good on which they spend a very large portion of their income causes such a large increase in their purchasing power that creates a large negative income effect. They will therefore reduce the consumption of that good when its price falls since large negative income effect outweighs the substitution effect.

The price-demand relationship in case of a Giffen good is illustrated in Fig. 8.46. With a certain given price-income situation depicted by the budget line PL1, the consumer is initially in equilibrium at Q on indifference curve IC1. With a fall in price of the good, the consumer shifts to point R on indifference curve IC2. It will be seen From Fig. 8.46 that with the fall in price and, as a result, the shift of the budget line from PL1 to PL2 the consumer reduces his consumption of the good X from OM to ON.

This is the net effect of the negative income effect which is here equal to HN which induces the consumer to buy less of good X and the substitution effect which is equal MH which induces the consumer to buy more of the good. Since the negative income effect HN is greater than the substitution effect MH, the net effect is the fall in quantity purchased of good X by MN with the fall in its price. Thus, the quantity demanded of a Giffen good varies directly with price. Therefore, if a demand curve showing price-demand relationship of a Giffen good is drawn, it will slope upward.

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