Giffen good

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A good for which quantity demanded falls when its price falls. This can in theory occur: a Giffen good must be inferior with limited possibilities for substitution. A fall in the price of a good increases real purchasing power: if the good is inferior the income effect of this rise in real income is negative. The substitution effect of a price fall cannot be negative, but it can be small. If the substitution effect is smaller than the negative income effect, the overall effect of a fall in price is a fall in consumption.

Subjects: Economics.

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