Sociology Index

Giffen Good

In Giffen Good, higher price leads to higher demand but for different reason to Veblen good. Demand rises with higher price because the income effect of higher price outweighs the substitution effect. Giffen goods are those goods whose demand moves in the same direction as the price variation. Giffen good is one which people consume more of as the price rises, which goes against the law of demand. Normally, as the price of a good rises, the substitution effect causes consumers to purchase less of it and more of substitute goods. In a situation of Giffen Good, the income effect dominates, leading people to buy more of the good, even as its price rises. A Giffen good is a good that is in greater demand as its price increases. If the price of an essential food staple rises it may mean that consumers have less money to buy more expensive foods, and as a result they will in effect be forced to buy more rice.

Other related concepts to Giffen Good include Veblen Effects, Counter-Veblen Effect, Symbolic Communications, Conspicuous Consumption and Inconspicuous Consumption.

Giffen goods are named after Scottish economist Sir Robert Giffen. Alfred Marshall coined the term Giffen Good in the third edition of his “Principles of Economics”, 1895: “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.” 

Giffen's Paradox

According to the Law of Demand, when the price of a commodity falls the demand for it rises. Giffen's Paradox is an exception to this law. Giffen's Paradox is named after the 19th century British economist, Sir Robert Giffen. According to Giffen's Paradox, when the price of bread fell, the demand for it also fell. Giffen’s paradox is sometimes conflated with similar phenomena arising from quite different mechanisms, often based on preference externalities of some form. Giffen’s paradox refers both to a phenomenon, failure of the law of demand for standard competitive demand – and to a particular mechanism underpinning that phenomenon, income effects.

Giffen’s Paradox. Nachbar J. (2008).
Abstract: Giffen’s paradox refers to the possibility that standard competitive demand, with nominal wealth held constant, can be upward sloping, violating the law of demand. From the Slutsky equation, Giffen’s paradox arises if and only if a good is inferior and the income effect is larger than the absolute value of the substitution effect. A Giffen good is a good for which Giffen’s paradox can arise. Giffen preferences are preferences that can exhibit Giffen’s paradox. Successful brands supplement consumer experience with a range of Veblen goods, in which the demand for Veblen goods such an Apple iPhone increases even if the unit price increases, as you pay a premium for the status conferred through its ownership and consumption.

GIFFEN BEHAVIOR AND SUBSISTENCE CONSUMPTION
Robert T. Jensen, Nolan H. Miller, John F. Kennedy School of Government, Harvard University, American Economic Review.
Abstract: This paper provides the first real-world evidence of Giffen behavior, i.e., upward sloping demand. Subsidizing the prices of dietary staples for extremely poor households in two provinces of China, we find strong evidence of Giffen behavior for rice in Hunan, and weaker evidence for wheat in Gansu. The data provide new insight into the consumption behavior of the poor, who act as though maximizing utility subject to subsistence concerns, with both demand and calorie elasticities depending significantly, and non-linearly, on the severity of their poverty. Understanding this heterogeneity is important for the effective design of welfare programs for the poor.

A tale of two cities and a Giffen good
Rod Garratt, Canadian Journal of Economics, Volume 38, Issue 1.
Abstract. A scenario is provided in which a house in Eden Mills, Ontario, is a Giffen good. The conditions derived in the example apply to other indivisible goods as well.

Where lies the general boundary between Veblen Good and Giffen Good? Does this boundary apply in all countries?
David Boansi, University of Bonn. By the law of demand, increasing price of a commodity is (all things being equal) expected to dampen demand for that commodity. However, demand for Veblen goods and Giffen goods is in contradiction with the usual law of demand. In as much as Veblen goods are linked to the notion of "it is more expensive, it must be of better quality", Giffen goods are linked to the notion of "that's all we have and can afford: limitation of choice". Differences in availability of commodities and the role they play across countries tend to blur Veblen goods and Giffen goods identification. For example, in as much as a commodity "A" may be what a country "V" has to depend on and can afford (in which case it may serve as a potential Giffen good), such commodity may be very scarce in another country "G" although of a very high importance/relevance (thereby stimulating demand for it even when prices increase). This creates somewhat room for confusion in distinguishing between the two aforementioned goods.