In economics and consumer theory , a Giffen good is a product that people consume more of as the price rises and vice versa—violating the basic law of demand in microeconomics. For any other sort of good, as the price of the good rises, the substitution effect makes consumers purchase less of it, and more of substitute goods ; for most goods, the income effect due to the effective decline in available income due to more being spent on existing units of this good reinforces this decline in demand for the good. But a Giffen good is so strongly an inferior good in the minds of consumers being more in demand at lower incomes that this contrary income effect more than offsets the substitution effect, and the net effect of the good's price rise is to increase demand for it. A Giffen good is considered to be the opposite of an ordinary good. Giffen goods are named after Scottish economist Sir Robert Giffen , to whom Alfred Marshall attributed this idea in his book Principles of Economics , published in
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In economics and consumer theory , a Giffen good is a product that people consume more of as the price rises and vice versa—violating the basic law of demand in microeconomics. For any other sort of good, as the price of the good rises, the substitution effect makes consumers purchase less of it, and more of substitute goods ; for most goods, the income effect due to the effective decline in available income due to more being spent on existing units of this good reinforces this decline in demand for the good.
But a Giffen good is so strongly an inferior good in the minds of consumers being more in demand at lower incomes that this contrary income effect more than offsets the substitution effect, and the net effect of the good's price rise is to increase demand for it. A Giffen good is considered to be the opposite of an ordinary good.
Giffen goods are named after Scottish economist Sir Robert Giffen , to whom Alfred Marshall attributed this idea in his book Principles of Economics , published in Giffen first proposed the paradox from his observations of the purchasing habits of the Victorian era poor. For almost all products, the demand curve has a negative slope: as the price increases, demand for the good decreases. See Supply and demand for background. Giffen goods are an exception to this general rule.
Unlike other goods or services, the price point at which supply and demand meet results in higher prices and greater demand whenever market forces recognize a change in supply and demand for Giffen goods.
As a result, when price goes up, the quantity demanded also goes up. To be a true Giffen good, the good's price must be the only thing that changes to produce a change in quantity demanded. A Giffen good should not be confused with products bought as status symbols or for conspicuous consumption Veblen goods , although there may be some overlap as consumers are more likely to engage in conspicuous consumption as a way to engage in "aspirational spending" as a way to increase their social status.
The classic example given by Marshall is of inferior quality staple foods , whose demand is driven by poverty that makes their purchasers unable to afford superior foodstuffs. As the price of the cheap staple rises, they can no longer afford to supplement their diet with better foods, and must consume more of the staple food.
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 the marginal utility of money to them so much 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.
There are three necessary preconditions for this situation to arise: [ citation needed ]. If precondition 1 is changed to "The goods in question must be so inferior that the income effect is greater than the substitution effect" then this list defines necessary and sufficient conditions.
The last condition is a condition on the buyer rather than the goods itself, and thus the phenomenon is also called a "Giffen behavior".
This can be illustrated with a diagram. The line MN is known as the consumer's budget constraint. Given the consumer's preferences, as expressed in the indifference curve I 0 , the optimum mix of purchases for this individual is point A. A price drop for commodity X causes two effects. The reduced price alters relative prices in favour of commodity X, known as the substitution effect.
This is illustrated by a movement down the indifference curve from point A to point B a pivot of the budget constraint about the original indifference curve. At the same time, the price reduction increases consumer purchasing power, known as the income effect an outward shift of the budget constraint. The substitution effect point A to point B raises the quantity demanded of commodity X from X a to X b while the income effect lowers the quantity demanded from X b to X c. The net effect is a reduction in quantity demanded from X a to X c making commodity X a Giffen good by definition.
Any good where the income effect more than compensates for the substitution effect is a Giffen good. Evidence for the existence of Giffen goods has generally been limited. Another paper by the same authors experimentally demonstrated the existence of Giffen goods among people at the household level by directly subsidizing purchases of rice and wheat flour for extremely poor families.
Giffen goods are difficult to study because the definition requires a number of observable conditions. One reason for the difficulty in studying market demand for Giffen goods is that Giffen originally envisioned a specific situation faced by individuals in poverty.
Modern consumer behaviour research methods often deal in aggregates that average out income levels, and are too blunt an instrument to capture these specific situations. Complicating the matter are the requirements for limited availability of substitutes, as well as that the consumers are not so poor that they can only afford the inferior good.
For this reason, many text books use the term Giffen paradox rather than Giffen good. Some types of premium goods such as expensive French wines, or celebrity-endorsed perfumes are sometimes called Giffen goods—via the claim that lowering the price of these high status goods decreases demand because they are no longer perceived as exclusive or high status products.
However, to the extent that the perceived nature of such high status goods actually changes significantly with a substantial price drop, this behavior disqualifies them from being considered Giffen goods, because the Giffen goods analysis assumes that only the consumer's income or the relative price level changes, not the nature of the good itself.
If a price change modifies consumers' perception of the good, they should be analysed as Veblen goods. Some economists [ who? Potatoes during the Irish Great Famine were once considered to be an example of a Giffen good. However, Gerald P. Dwyer and Cotton M. Lindsey challenged this idea in their article Robert Giffen and the Irish Potato ,   where they showed the contradicting nature of the Giffen "legend" with respect to historical evidence.
Charles Read has shown with quantitative evidence that bacon pigs showed Giffen-style behaviour during the Irish Famine, but that potatoes did not. Some suggest that a number of other goods, such as cryptocurrencies like Bitcoin , might be Giffen.
While the arguments are theoretically sound i. Anthony Bopp proposed that kerosene , a low-quality fuel used in home heating, was a Giffen good. Schmuel Baruch and Yakar Kanai suggested that shochu , a Japanese distilled beverage, might be a Giffen good.
In both cases, the authors offered supporting econometric evidence. However, the empirical evidence has been generally considered incomplete.
In a article, Sasha Abramsky of The Nation conjectured that gasoline , in certain circumstances, may act as a Giffen good. However, no supporting evidence was offered, and evidence from the large increases in oil prices in would suggest that quantity demanded for gasoline did actually fall as a result of increased prices.
From Wikipedia, the free encyclopedia. Not to be confused with Veblen goods. The Economic Journal. Principles of Economics. VI, Para. Agricultural Economics. American Economic Review. Journal of the Experimental Analysis of Behavior.
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Difference Between Giffen Goods and Inferior Goods
A Giffen good is a low income, non-luxury product that defies standard economic and consumer demand theory. Demand for Giffen goods rises when the price rises and falls when the price falls. The concept of Giffen goods focuses on a low income, non-luxury products that have very few close substitutes. Giffen goods can be compared to Veblen goods which similarly defy standard economic and consumer demand theory but focus on luxury goods. Examples of Giffen goods can include bread, rice, and wheat.
Various types of goods are studied in economics, like normal goods, inferior goods, luxury goods, Veblen goods, Giffen goods. Giffen goods are goods whose demand increases with the increase in its price and vice versa. As the income effect of Giffen goods and Inferior goods is negative, the two are commonly juxtaposed for one another. So, this article might help you in understanding the difference between Giffen goods and Inferior goods. Basis for Comparison Giffen goods Inferior Goods Meaning Giffen goods refers to those goods whose demand goes up with the rise in the prices. Inferior goods are goods whose demand falls down with the rise in the consumer's income over a specified level. What is it?