ECON 401 Chapter Notes - Chapter 8: Giffen Good, Substitute Good, Slutsky Equation
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ECON 401 Full Course Notes
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Giffen good: when a good"s price decreases and the demand decreases along with it. Apple farmer example: if the price of apples goes up, the demand might decrease for most consumers. But if the prices of apples goes up then the apple farmer will make more money and could possibly afford to consume more of his own apples. This means when the price of apples goes up, the farmers demand for apples might go up as well, making apples a giffen good. Two effects happen when the price of a good changes. Substitution effect: the change in the exchange rate between two goods. If good 1 one becomes cheaper, it means you have to give up less of good. The change in the price of good 1 had change the rate at which the market allows you to substitute good 2 for good 1. The trade-off between the two goods that the market presents the consumer has changed.