Economic Quick Tip: Normal, Inferior, Giffen, and Veblen Goods

Normal goods have positive income effects to price decreases and positive income elasticity. Positive income elasticity simply means that if you earn more money, you will buy more of the normal good. Inferior goods have negative income effects to price decreases and negative income elasticity of demand. Negative income elasticity simply means that if you earn more money, you will buy less of inferior goods.

Giffen goods are inferior goods that do not have readily available substitutes. The income effect is greater than the substitution effect. What this means is that it has an upward sloping demand curve, based solely on the price increase of an inferior good with no comparable substitute. This phenomenon goes against the basic law of demand. This good is said to be very rare. A common example often cited are impoverished people who have to pay more for rice, as price of rice increases. And because meat is too expensive, people will have to use more of their resources for rice purchases and buy less meat (the substitute).

Veblen goods are not inferior goods, but rather goods in which demand increases as price increases. It is similar to Giffen goods as it contradicts the basic law of demand by having an upward sloping demand curve, but the fundamentals behind this phenomenon are completely adversary. Common examples are designer bags or luxury cars.  Essentially, the higher the price and higher the exclusivity, the higher the demand is for goods/services (typically by more affluent consumers). ​