ECON201 Lecture Notes - Lecture 8: Pepperoni, Inferior Good, Xm Satellite Radio

• School: University of Waterloo
• Department: Economics
• Course: ECON201
• Professor: Corey Vande Waal

Document Summary

This scenario is the very special case of a giffen good. In empirical studies, researchers have found little or no evidence that giffen goods exist in reality. One class of goods display this behavior in the short run. Let"s see how this decomposition works using our graphing analysis. When we decompose the partial effect of a fall in px, we want to account for the change due to the new relative prices (se). This is the move from a to b (similar to our prior analysis). However, for a giffen good, the income effect (from b to: is negative and strong enough to more than offset the se (from a to b). Therefore, the te (a to c) no longer displays the negative relationship between px and x (resulting in an upward sloping demand curve). Decomposing a price change (slutsky decomposition: decomposition of a price change for a giffen good (a special case of an inferior good)