SSC CPO 2025 PYQ — Question 6

Answer: (D) Giffen Paradox

Explanation –

The Law of Demand states that, ceteris paribus (all other things remaining equal), as the price of a good increases, its demand decreases. However, the 'Giffen Paradox' is a major exception to this rule. Sir Robert Giffen observed that in the case of highly inferior or essential goods (such as low-grade grains), when their prices rise, poor people reduce their consumption of other expensive goods (such as meat or fruits) and begin purchasing larger quantities of that very inferior good to satisfy their hunger.

Consequently, in this scenario, demand actually increases as the price rises—a phenomenon contrary to the Law of Demand. This situation arises when the 'Income Effect' of the good is stronger than its 'Substitution Effect.' Giffen goods are, in essence, a specific subset of 'inferior goods.'

Additional Points –

Leontief Paradox: This relates to international trade and suggests that capital-abundant nations, such as the United States, were exporting labor-intensive goods.

Paradox of Thrift: A concept proposed by Keynes, which posits that if everyone in a society begins to save more, aggregate demand will fall, and ultimately, aggregate savings will also decline.

Easterlin Paradox: This suggests that, beyond a certain threshold, an increase in income does not lead to a corresponding increase in happiness.

Potential Exam Questions and Answers –

Question: What is the 'Veblen Effect'?

Answer: It pertains to luxury goods (such as diamonds or expensive cars), the demand for which increases as their price rises, primarily to demonstrate social status or prestige.

Question: What is the nature of the 'Income Effect' for Giffen goods?

Answer: Negative.