Consider the following statements about Giffen goods:

  1. Giffen good is a special sort of inferior good
  2. Increase in price of Giffen good causes an increase in demand

   Which of the above statements is/are correct?

Answer: [C] Both 1 & 2

Both are correct statements
Giffen good is a special sort of inferior good. Giffen goods are those goods where a fall in the price of the good causes a fall in its demand and vice versa.
The concept was given by Sir Robert Giffen.  Alfred Marshall first publicized this idea in the 1895 edition of his Principles of Economics:
“As Mr. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.
To understand the Giffen Goods which is more appropriately Giffen behavior, we can imagine an individual whose diet consists of two foods viz. Bread and Chicken.
The Bread provides high calories but he likes chicken because of the taste. He purchases bread to get the calories required, but whatever money is left, he buys Chicken also to satisfy his taste and preference. If the price of the bread increases, he would buy more bread and would cut the consumption of Chicken, because it is out of his reach now. So, he is no longer able to afford his normal diet bundle and would increase his consumption of bread rather than purchasing Chicken and keeping himself hungry. The Giffen Goods are an exception to the law of demand.

This question is a part of GKToday's Integrated IAS General Studies Module