What’s Giffen Good?

Giffen goods are low-income, non-luxury products that defy economic and consumer demand theory. Giffen product demand increases and decreases with price. In econometrics, this leads to an upward-sloping demand curve, unlike the fundamental rules of demand that result in a downward slope. The phrase “Giffen goods” originated in the late 1800s and was named after Scottish economist, statistician, and writer Sir Robert Giffen. Giffen commodities are low-income, non-luxury products with limited alternatives. Like Veblen goods, Giffen commodities contradict economic and consumer demand theory but focus on luxury products.

Among Giffen’s products are bread, rice, and wheat. Many basics have a few near-dimensional replacements at the same price.

Know Giffen Goods

Giffen products are rare in economics since supply and demand contradict traditions. Supply, demand, price, income, and substitution can cause giffied commodities. Fundamental supply-and-demand economic theories involve all of these elements. A study of Giffen items shows that these factors affect low-income, non-luxury commodities, resulting in an upward demand curve.

Supply-and-demand

The rules of supply and demand regulate macro- and microeconomic theories. Economists say that when prices rise, demand declines, generating a downward spiral. Demand rises as prices decline, generating an upward slope. Because personal money changes behavior, it can somewhat flatten curves. Substitution and its effects can be considerable. Since most things have replacements, the substitution effect supports conventional supply and demand.

Giffen products have significant income and substitution effects. The demand curve for Giffen items slopes upward, indicating more robust demand at higher prices. Giffen items have few substitutes; therefore, customers will buy them even when prices rise. Due to their need, commodities have both an income effect and a higher price substitution effect. Giffen items are essential. Therefore, buyers are ready to spend more for them, but this restricts discretionary cash, making slightly higher choices even more unattainable. Thus, people buy more Giffen. Overall, income and substitution impacts produce atypical supply and demand.

Historical Research and Giffen Successful Examples

In Principles of Economics, Alfred Marshall cited Robert Giffen’s findings about increased bread prices due to limited revenue for meat purchases. In 1947, George J. Stigler criticized the meat-bread example in “Notes on the History of the Giffen Paradox.”A 2007 field experiment by Harvard economists Robert Jensen and Nolan Miller in Hunan, where rice is a staple, and Gansu, where wheat is, provided another example of a Giffen product. Randomly selected families in both provinces received vouchers for subsidized staple food purchases.7

Hunan families showed high Giffen rice behavior, according to Jensen and Miller. Lowering rice prices with subsidies lowered family demand, but raising prices without subsidies increased demand. Gansu has less wheat evidence.

Veblen vs. Giffen

Giffen and Veblen’s products are non-standard items that defy supply-and-demand rules. Giffen and Veblen products have upward-sloping demand curves. The econometrics of Giffen goods’ upward-sloping demand curve depend on income and substitution.

Veblen products likewise exhibit an upward demand curve, but with distinct influences. Veblen products are luxurious. Example: celebrity-endorsed fragrances or luxury wines. With these commodities, high prices indicate high social standing. Thus, high-income buyers choose these things at incredible prices. Income does not affect these commodities; hence, the income effect is negligible. Since products are status symbols and not cross-dimensional, substitution is negligible.

Conclusion

• Demand for low-income, non-luxury Giffen goods rises with price, and vice versa.
• Unlike the fundamental demand principles, a Giffen product has an upward-sloping demand curve.
• Income pressures and a lack of near replacements drive Giffen product demand.
• Veblen products are like Giffen but more luxurious.