For Giffen goods, the income effect dominates the substitution effect.

Question

Quizplus · Accepted Answer

Giffen goods are a rare type of inferior goods for which the demand increases as the price increases, which is opposite of the typical law of demand. The income effect for Giffen goods occurs when the price increases, reducing the consumer's real income and making them unable to afford alternatives, leading to further purchases of the inferior good. The substitution effect, which occurs when the consumer switches to a cheaper alternative as the price increases, is weak or non-existent for Giffen goods. Therefore, the income effect dominates the substitution effect for Giffen goods.

For Giffen Goods, the Income Effect Dominates the Substitution Effect