Understanding the Paradox of Giffen 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. This results in an upward-sloping demand curve, contrary to the fundamental laws of demand, which typically create a downward sloping curve. The term “Giffen good” was coined in the late 1800s, named after Sir Robert Giffen, a Scottish economist, statistician, and journalist. The concept focuses on essential, low-income products that have very few substitutes. Giffen goods can be compared to Veblen goods, which similarly defy standard economic theories but focus on luxury items.
Examples of Giffen Goods
Examples of Giffen goods include essentials such as bread, rice, and wheat. These goods are often fundamental to daily life and have very few substitutes within their price range.
Unconventional Insights on Giffen Goods
Giffen goods challenge conventional economic principles. Various factors—including supply, demand, price, income, and substitution effects—affect these goods, giving rise to an upward sloping demand curve.
Key Takeaways
- A Giffen good is a low-income, non-luxury product for which demand increases as prices rise and decreases as prices fall.
- The demand curve of a Giffen good is upward-sloping, contrary to standard laws of demand.
- Demand for Giffen goods is significantly influenced by a lack of close substitutes and pressures on income.
- Veblen goods share similarities with Giffen goods but focus on luxury items.
The Intricate Dance of Supply and Demand
The laws of supply and demand dominate economic theories, dictating that as prices rise, demand falls, and as prices fall, demand increases. However, Giffen goods defy this norm. In cases of Giffen goods, scarcity of close substitutes and increased income pressure create an unconventional scenario where demand rises with rising prices.
Historical Context and Evidence of Giffen Goods
In the textbook “Principles of Economics,” economist Alfred Marshall discusses Robert Giffen’s work, particularly the case of bread prices rising because people couldn’t afford meat. Georges J. Stigler later challenged the meat-bread example. However, a 2007 study by Harvard economists Robert Jensen and Nolan Miller in Hunan and Gansu provinces of China provided compelling evidence of Giffen behavior, particularly with rice among Hunan households. Reducing the price of rice through subsidies decreased its demand, whereas removing the subsidy increased demand.
Contrasting Veblen Goods with Giffen Goods
Both Giffen and Veblen goods have upward-sloping demand curves but are influenced differently. While Giffen goods are low-income essentials with few substitutes, Veblen goods are luxury items whose high prices attract affluent consumers due to their status-symbol nature. High-priced perfumes or fine wines are classic examples of Veblen goods, desirable more at higher prices due to their association with social status.
Related Terms: Law of Demand, Supply and Demand, Veblen goods, Substitution Effect, Income Effect.
References
- The Law Dictionary. “Giffen Good Definition & Legal Meaning”.
- Harvard University. “Giffen Behavior: Theory and Evidence”. Pages 1-2. Download PDF.
- Harvard University. “Giffen Behavior: Theory and Evidence”. Pages 4-5. Download PDF.
- Alfred Marshall. “Principles of Economics, Unabridged Eighth Edition”, Pages 109-110. Cosimo Classics, 2009.
- Stigler, George J. “Notes on the History of the Giffen Paradox”. The Journal of Political Economy, vol. 55, no. 2, April 1947, pp. 152–153.
- Harvard University. “Giffen Behavior: Theory and Evidence”. Page 4. Download PDF.
- IFT. “Concept 18: Substitution and Income Effects”.
- Thorstein Veblen. “The Theory of the Leisure Class: an Economic Study of Institutions”, Pages 68-101. Macmillan, 1912.
