Wednesday

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 7 Topics for Further Study
Chapter 21 of 36 The Theory of Consumer Choice
Section 17 of 26
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Figure 12 – A Giffen Good
In the case of a “Giffen Good”
Here, when the price of potatoes rises, the consumer's optimum shifts from point C to point E.
The consumer has responded to a higher price of potatoes by buying less meat and more potatoes.
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Using the theory of consumer choice we can consider and offer answers to the following three questions about how the economy works.
Because each question involves household buying decision-making, we can apply the model of consumer choice.
The three questions:
1- Do all demand curves slope downward?
2- How do wages affect labor supply?
3- How do interest rates affect household saving?
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1- Do all demand curves slope downward?
Usually, when the price of a good rises people buy less of it.
This behavior, called the law of demand, results in a downward-sloping demand curve.
However, demand curves can sometimes slope upward.
Consumers can sometimes violate the law of demand and buy more of a good when the price of that good rises.
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Consider the example in Figure 12.
The consumer buys two goods, meat and potatoes.
Initially, the consumer's budget constraint is the line from point A to point B
and the optimum is point C.
Then, when the price of potatoes rises, the budget constraint shifts inward and becomes the line from point A to point D and the optimum becomes point E.
Here, a rise in the price of potatoes has led the consumer to buy a larger quantity of potatoes.
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Why is the consumer responding in this seemingly perverse way?
It is because here the income effect is stronger than the substitution effect.
Income effect:
In this case, potatoes are an inferior good.
When the price of potatoes rises, the consumer is poorer.
The income effect makes the consumer want to buy less meat, which is still more expensive than potatoes, and more potatoes.
Substitution effect:
Because potatoes have become more expensive relative to meat the substitution effect the consumer wants to buy more meat and less potatoes.
In this case, the income effect is so strong it exceeds the substitution effect.
The consumer responds to the higher price of potatoes by buying less meat and more potatoes.
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Economists use the term Giffen good for a good that violates the law of demand.
The term name is from economist Robert Giffen, who first explained this possibility.
In this example, potatoes are a Giffen good.
Giffen goods are inferior goods for which the income effect dominates the substitution effect.
Therefore, they have demand curves that slope upward.
Another example: the bus fare rises, the consumer is poorer, so has to use the bus more and taxis less.
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potatoes and meat
jagaimo to niku
ジャガイモと肉