Glossary Post 4

Giffen Good

What is a ‘Giffen Good’

A Giffen good is a good for which demand increases as the price increases, and falls when the price decreases. A Giffen good has an upward-sloping demand curve, which is contrary to the fundamental law of demand which states that quantity demanded for a product falls as the price increases, resulting in a downward slope for the demand curve. A Giffen good is typically an inferior product that does not have easily available substitutes, as a result of which the income effect dominates the substitution effect. Giffen goods are quite rare, to the extent that there is some debate about their actual existence. The term is named after the economist Robert Giffen.

Laffer Curve

What is the ‘Laffer Curve’

The Laffer Curve is a theory developed by supply-side economist Arthur Laffer to show the relationship between tax rates and the amount of tax revenue collected by governments. The curve is used to illustrate Laffer’s main premise that the more an activity such as production is taxed, the less of it is generated. Likewise, the less an activity is taxed, the more of it is generated.

BREAKING DOWN ‘Laffer Curve’

Laffer Curve

The Laffer Curve suggests that, as taxes increase from low levels, tax revenue collected by the government also increases. It also shows that tax rates increasing after a certain point (T*) would cause people not to work as hard or not at all, thereby reducing tax revenue. Eventually, if tax rates reached 100%, shown as the far right on his curve, all people would choose not to work because everything they earned would go to the government. Governments would like to be at point T*, because it is the point at which the government collects maximum amount of tax revenue while people continue to work hard.

References

Picardo, C. E. (2015, July 24). Giffen Good. Retrieved July 24, 2017, from http://www.investopedia.com/terms/g/giffen-good.asp

Staff, I. (2015, September 11). Laffer Curve. Retrieved July 24, 2017, from http://www.investopedia.com/terms/l/laffercurve.asp

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