Different Types of Goods-2

I continue to lecture about types of goods on this article where i stayed at the previous post. There are two types of goods that need to be known and those types of goods have anomalies which are contrary to the law of demand. One of them is Giffen Good and the other one is Veblen Good. Let's start with Giffen good.

Giffen Good: A giffen good is a good that as price rises, demand increases and, as price falls, demand decreases. The increase in demand stems from the income effect of the higher price outweighing the substitution effect. It is hard to find empiricial evidence about it but it can be applied to extremely poor people who have limited diet.
Suppose that you are very poor and you can't afford other alternative expensive foodstuff. On the other hand, the price of your basic foodstuff is increasing. In that situation, you will end up buying more your basic foodstuff. Because, it is the only foodstuff that you can afford.

                                                          Diagram for Giffen Good

Veblen Goods: A veblen good is a good that as price rises, demand increases and, as price falls, demand decreasse because of its exclusive nature and appeal as a status symbol. A veblen good has an upward-sloping demand curve like giffen good.

Studies suggest that people get more satisfaction from buying expensive goods and very expensive goods are indicator of having a hıgher status in society. Besides, consumers think that more expensive goods have better quality. Very expensive goods-such as designer jewelry, pricey watches, luxury cars can be classified as veblen goods.

The Basic Similarity and Difference Between Giffen Good and Veblen Good: For both giffen good and veblen good, as prices rises, demand increases. But, for veblen good, people demand more because the good is indicator of having a higher status in society and people think that it is expensive because it is a better quality. For giffen good, people demand more because the income effect outweighs the substitution effect.

Different Types of Goods-1

First, i will tell you about income elasticity of demand and cross elasticity of demand in order to make easy to understand the type of goods.

Income Elasticity of Demand: It measures the susceptibility of demand in reaction to change in income.
Cross Elasticity of Demand: It measures the quantity of demanded one good in response to a change in price of another.

Normal good: It is a good or service that as consumer income increases, demand of the good rises but, at a rate lesser than the rate of increase in income. In other words, income elasticity of demand increase is positive but, less than one. For instance, if the demand for clothing increases by %8 when real income increases by %12, clothing is classified as a normal good and it is said that it has %12 income elasticity.

Luxury good: It is a good or service that as consumer income increases, demand of the good rises at a rate that bigger than the rate of increase in income. It means that income elasticity of demand is bigger than one. If the demand for sports cars increase by %15 when real income increases %10 then, it is classified as luxury good.

Inferior good: It is a good or service that as consumer income increases, demand of the good falls. As consumer becomes finacially better, the demand for such goods fall because consumers can now afford higher priced goods and services. For example, a consumer prefer his personel car if his financial situation gets better rather than public transportation. In that case, public transportation is an inferior good.
It is a good that has a neagtive income elasticity. Because, demand of inferior good decreases at a rate more than the change consumer's income.

Complementary goods: It is a good or service that its use is dependant to another associated goods or service. For example, tennis ball and tennis racket, car and gasoline.
Complementary goods have a negative cross elasticity of demand. If the price for one good increses, the demand for both complementary goods fall. The more goods are linked eachother, the higher cross elasticity of demand.

Substitute goods: Substitute goods are two different goods which can be used to satisfy same needs. If the price of one good rises, the demand for the substitue increase. Hence, substitutes good have positive elasticity of demand.