Question

Briefly explain in a sentence or two how you could tell
a.       whether a good is a normal good or an inferior good.
b.      whether a good is a Giffen good.
c.      whether two goods are complements or substitutes

Answer 1

A. Normal goods : normal goods are those goods whose demand increases with increase in the income of the consumers. Eg : milk, cloth etc.

Inferior goods : inferior goods are those goods whose demand decreases with a rise in the income of the consumers. E.g: jowar, khadi cloth etc.

B. Giffen goods are those special kinds of inferior goods in which consumer spend the part of their income when demand rises with an increase in price and falls when decrease in price. E.g : rice and potatoes.

C. Complementary goods : these are those goods which jointly satisfy a given want . E.g: Car and petrol. Having negative relation between the price of the car and demand of the petrol.

Substitute goods : these are those goods can be used in place of each other. Example- tea and coffee. Having a positive relation between the price of the coffe and demand of the tea.