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Giffen Good - Definition, Conditions and Practical Example

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A Giffen good, a concept commonly used in economics, refers to a good that people consume more as the price rises. Therefore, a Giffen good shows an ... Home›Resources›Knowledge›Economics›GiffenGoodGiffenGoodAgoodthatpeopleconsumemoreofasthepricerisesUpdatedMay6,2022WhatisaGiffenGood?AGiffengood,aconceptcommonlyusedineconomics,referstoagoodthatpeopleconsumemoreasthepricerises.Therefore,aGiffengoodshowsanupward-slopingdemandcurveandviolatesthefundamentallawofdemand.ItisimportanttonotethatallGiffengoodsareinferiorgoods,butnotallinferiorgoodsareGiffengoods.  HistoryofGiffenGoodThetermGiffengoodwasnamedafterScottisheconomistSirRobertGiffen.ThetermGiffengoodwasdevelopedbytheeconomistafterhenoticed,inthepoorVictorianera,thattheriseinthepriceofabasicfoodincreasedthedemandforthatparticularfood. TheIntuitionBehindaGiffenGoodTheconceptofaGiffengoodsoundscounterintuitive–whywouldanindividualconsumemoreofagoodifitspriceincreases?Considerapoorhouseholdwithamaximummonthlyexpenditureonfoodat$400andaminimumconsumptionofgrainsat50kg.Thehouseholdconsumestwogoodstomeettheirgrainconsumptiondemand:riceandwheat.Riceisconsideredaninferiorgood,ischeaperthanitssubstitutes,andrepresentsalargeportionofthehousehold’sspending.Wheatisconsideredanormalgood. Thefollowingillustratesthehousehold’sconsumptionofriceandwheat:  Considerascenariowherethepriceofriceincreasesto$6.Inthissituation,tomaintainitscurrentconsumption,thehouseholdwouldneedtospend$440:  Therefore,forthehouseholdtogetitstotalexpendituretoremainat$400andmeetitsconsumptionlevelof50kg,itwouldneedtoconsumemorericeandlesswheattomeetitsconsumptiondemand:  Aswenoted,thedemandforricerosefrom40kgto43kgdespiteitsincreaseinprice.Therefore,riceisanexampleofaGiffengood. ConditionsforaGiffenGoodAsnotedintheexampleabove,therearecertainconditionsforaGiffengood: 1.ThegoodmustbeinferiorThegoodmustbeaninferiorgoodasitslowercomparablecostsdriveanincreaseddemandtomeetconsumptionneeds.Inabudgetshortage,theconsumerwillconsumemoreoftheinferiorgoods.Asindicatedintheexampleabove,sincericeisaninferiorgood,thehouseholdwillconsumemorericetomaintaintheirhouseholdbudgetof$400. 2.ThegoodmustformalargepercentageoftotalconsumptionThetotalamountspentonthegoodmustbelargerelativetotheconsumer’sbudget.Onlyinsuchascenariowillanincreaseinitspricecreateasignificantincomeeffect.Asindicatedintheexampleabove,ricerepresents80%ofthequantitydemandedofgrains.Inaddition,riceformshalfofthehousehold’sexpenditure. 3.TheremustbealackofclosesubstitutegoodsThegoodmusteitherhavealackofclosesubstitutesorthesubstitutegoodmusthaveahighercostthanthegood.Evenifthereisanincreaseinthepriceofthegood,thecurrentgoodshouldstillbeanattractiveoptionfortheconsumer.Inotherwords,thesubstitutioneffectcreatedbytheincreaseinthepriceofthatgoodmustbesmallerthantheincomeeffectcreatedbytheincreasedcostrequirement.Asindicatedintheprefaceoftheexampleabove,riceischeaperthanitssubstitutes. PracticalExampleofa GiffenGood:HunanandGansuIn2007,HarvardeconomistsRobertJensenandNolanMillerconductedanexperimentwheretheystudiedtwoprovincesinChina:HunanandGansu.InHunan,thestaplefoodisrice,whereasinGansu,thestaplefoodiswheat.Theexperimentindicatedthat:InHunan,Giffenbehaviorwasexhibited–loweringthepriceofricethroughasubsidydecreasedthedemandforricewhileremovingthesubsidyincreasedthedemandforrice.InGansu,Giffenbehaviorwasrelativelyweakerduetotheavailabilityofsubstitutegoodsandthefactthathouseholdsweresopoorthattheyonlyconsumedstaplefoods.Readthefullpaperhere. AdditionalResourcesThankyouforreadingCFI’sguidetoGiffenGood.Tokeepadvancingyourcareer,theadditionalCFIresourcesbelowwillbeuseful:AggregateSupplyandDemandInflationInvisibleHandInelasticDemandSharethisarticleGetCertifiedfor
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