Giffen Goods

Table of Contents

Giffen Goods
What are Giffen goods?
Understanding Giffen goods
Conditions to qualify as Giffen goods
Examples of Giffen goods
Frequently Asked Questions

Giffen Goods

The late 1800s saw the term “Giffen products” introduced in honour of renowned Scottish statistician, economist, and writer Sir Robert Giffen. Giffen goods are designed to be affordable, non-luxury items with few direct competitors.

What are Giffen goods?

Giffen goods are goods for which an increase in price leads to an increase in demand. This is in contrast to most goods, for which a price increase would lead to a decrease in demand. Giffen products can include commodities like rice, wheat, and bread. These goods are most needed, with few near-dimensional alternatives available at comparable prices.

Understanding Giffen goods

Giffen goods contradict the standard microeconomic law of demand. Giffen goods are goods that people purchase more of as the price increases. This is the opposite of the law of demand, which states that people will purchase less of these goods as their prices increase.

Giffen goods are rare, and most economists believe they only occur when the goods in question are necessities, and there are no close substitutes. This is because, in most cases, consumers will switch to a cheaper alternative if the price goes up. For example, if the price of bread goes up, consumers may switch to eating rice instead. But if the price of rice also goes up, then the consumer may be stuck with eating bread, even if the price is high. In this case, the consumer is said to be “price inelastic.”

Additionally, income effects occur when a change in price leads to a change in the amount of money people spend. For example, if the prices of Giffen goods increase, people will have to spend more money to purchase the same amount of the goods. This will decrease their overall purchasing power, which is known as a negative income effect.

It is important to note that Giffen goods are rare, and most economists believe they only exist in certain circumstances. For example, some economists believe that Giffen goods exist in developing countries where people have a very low income and spend a large proportion of their income on essential goods.

While Giffen goods are not common, they provide an important exception to the general rule that demand falls when prices rise. This exception is important to remember when making economic decisions, as it can help avoid unintended consequences.

Conditions to qualify as Giffen goods

The goods or commodities must be inferior

Due to higher demand and lower comparative prices, the commodities must be of inferior quality. Consumers will purchase more inferior goods when finances are limited.

There are no suitable alternatives

The goods may not be easily replaced, or the substitutes must be more expensive. The goods must be a desirable alternative for the buyer even if their prices increase. In other words, the income effect brought about by the increased price requirement must be lower than the substitution effect caused by the price rise.

The goods must violate the assumptions of a demand curve

According to the Giffen paradox, some items can defy the basic principles of microeconomics, namely, that demand for particular goods might grow simultaneously as prices increase. Giffen products must thus produce a downward rather than an upward-sloping demand curve on an economic graph.

The goods must account for a major portion of overall consumption

The goods’ overall costs must be high compared to the consumer’s budget. Only in this situation would price rises impact revenue.

Examples of Giffen goods

The Giffen paradox is evident in tobacco products. Smokers who are addicted are more inclined to spend more on cheap cigarettes as they get more costly. Other examples include bread, potatoes, rice, etc.

Frequently Asked Questions

What is the difference between Giffen and Veblen goods?

Giffen goods focus on non-luxury commodities, whereas Veblen goods exclusively focus on luxury ones. Giffen goods are those for which demand increases when prices rise and fall when prices fall. This is the opposite of the usual relationship between price and demand. Veblen goods are those good for which people willing to pay more as the price increases. This is because the high price is seen as a sign of quality.

How were Giffen goods discovered?

The discovery of Giffen goods is an interesting story. In the late 1800s, an English economist named Sir Robert Giffen was studying the effects of income on demand. He noticed that when people’s incomes increased, they bought less of some basic staples, like bread.

This didn’t make sense to Giffen, so he sought an explanation. He eventually realised that people bought less bread because they could afford better food. In other words, they were substituting better-quality goods for bread.

Giffen’s discovery was initially met with scepticism, but eventually, it was accepted as a valid economic principle. Giffen goods are now a well-known concept in economics.

What is the difference between Giffen goods and inferior goods?

Giffen goods are uncommon inferior goods with no ready equivalent or substitute, such as rice, bread and potatoes. The main difference between Giffen items and classic inferior goods would be that demand for the former grows even when prices rise, irrespective of a consumer’s income.

What is the Giffen goods demand curve?

The demand curve for Giffen goods slows upward, indicating greater demand at high prices. As there are few replacements for Giffen goods, people are still eager to buy them whenever the price rises.

Do Giffen goods have a positive income effect?

Yes, as the prices of Giffen goods decline, the positive income outweighs the negative substitution effect, and the customer purchases less of it.