A Giffen good is a product for which a rise in price of this product makes people buy even more of the product. Giffen goods may or may not exist in the real world, but there is an economic model that explains how such a thing could exist. Giffen goods are named after Sir Robert Giffen, who was attributed as the author of this idea by Alfred Marshall in his book Principles of Economics. In economics and business, the price is the assigned numerical monetary value of a good, service or asset. ... Buyers bargain for good prices while sellers put forth their best front in Chichicastenango Market, Guatemala. ... Sir Robert Giffen (1837 – April 12, 1910), was a British statistician and economist. ... Alfred Marshall Alfred Marshall (July 26, 1842–July 13, 1924), born in Bermondsey, London, England, became one of the most influential economists of his time. ... Principles of Economics is a book by economist Carl Menger which is credited with the founding of the Austrian School of economics. ...

For most products, price elasticity of demand is negative. In other words, price and demand pull in opposite directions; if price goes up, then quantity demanded goes down, or vice versa. Giffen goods are an exception to this. Their price elasticity of demand is positive. When price goes up the quantity demanded also goes up, and vice versa. In order to be a true Giffen good, price must be the only thing that changes to get a change in quantity demand, and conspicuous consumption does not enter the picture. In economics, the price elasticity of demand (PED) is an elasticity that measures the nature and degree of the relationship between changes in quantity demanded of a good and changes in its price. ... The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... Conspicuous consumption is a term introduced by the American economist Thorstein Veblen, in The Theory of the Leisure Class (1899). ...

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. A staple food is a basic but nutritious food that forms the basis of a traditional diet, particularly that of the poor. ... World map showing percentage of people living under national poverty lines. ...

Marshall wrote in the 1895 edition of Principles of Economics:

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.

Analysis of Giffen goods

There are three necessary preconditions for this situation to arise:

1. the good in question must be an inferior good,
2. there must be a lack of close substitute goods, and
3. the good must constitute a substantial percentage of the buyer's income.

If precondition #1 is changed to "The good in question must be so inferior that the income effect is greater than the substitution effect" then this list defines necessary and sufficient conditions. In consumer theory, an inferior good is a good that decreases in demand when the consumers income rises, unlike normal goods, for which the opposite is observed. ... In economics, one kind of good (or service) is said to be a substitute good for another kind insofar as the two kinds of goods can be consumed or used in place of one another in at least some of their possible uses. ...

This can be illustrated with a diagram. Initially the consumer has the choice between spending their income on either commodity Y or commodity X as defined by line segment MN (where M = total available income divided by the price of commodity Y, and N = total available income divided by the price of commodity X). The line MN is known as the consumer's budget constraint. Given the consumer's preferences, as expressed in the indifference curve Io, the optimum mix of purchases for this individual is point A. Image File history File links Giffen_good_small. ... An indifference curve is a graph showing combinations of goods for which a consumer is indifferent, that is, it has no preference for one combination versus another, as they render the same level of satisfaction for the consumer. ...

If there is a drop in the price of commodity X, there will be two effects. The reduced price will alter 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 causes the consumers' purchasing power to increase, known as the income effect (a outward shift of the budget constraint). This is illustrated by the shifting out of the dotted line to MP (where P = income divided by the new price of commodity X). The substitution effect (point A to point B) raises the quantity demanded of commodity X from Xa to Xb while the income effect lowers the quantity demanded from Xb to Xc. The net effect is a reduction in quantity demanded from Xa to Xc 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. The price of one thing (usually a good) in terms of another; ie, the ratio of two prices. ...

Empirical evidence for Giffen goods

Despite years of searching, no generally agreed upon example has been found. A 2002 preliminary working paper by Robert Jensen and Nolan Miller of Harvard University made the claim that rice and noodles are Giffen goods in parts of China. It is easier to find Giffen effects where the number of goods available is limited, as in an experimental economy: DeGrandpre et al (1993) provide such an experimental demonstration. In 1991, Battalio, Kagel, and Kogut proved that quinine water is a Giffen good for some lab rats. However, Battalio, Kagel, and Kogut were only able to show the existence of a Giffen good at an individual level and not the market level. Thus, at least one real-world example, albeit a weak example, of Giffen goods exists. One reason for the difficulty in finding Giffen goods is Giffen originally envisioned a specific situation faced by individuals in a state of 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. It is for this reason that many text books use the term Giffen Paradox rather than Giffen Good. Harvard University campus (old map) Harvard University (incorporated as The President and Fellows of Harvard College) is a private university in Cambridge, Massachusetts. ... Species Oryza glaberrima Oryza sativa Rice refers to two species (Oryza sativa and Oryza glaberrima) of grass, native to tropical and subtropical southeastern Asia and to Africa, which together provide more than one fifth of the calories consumed by humans[1]. Rice is an annual plant, growing to 1-1. ... A chef making hand-pulled noodles. ...

Some types of premium goods (such as expensive French wines, or celebrity-endorsed perfumes) are sometimes claimed to be Giffen goods. It is claimed that lowering the price of these high status goods can decrease demand because they are no longer perceived as exclusive or high status products. However, the perceived nature of such high status goods changes significantly with a substantial price drop. This disqualifies them from being considered as 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 question the empirical validity of the distinction between Giffen and Veblen goods, arguing that whenever there is a substantial change in the price of a good its perceived nature also changes, since price is a large part of what constitutes a product. However the theoretical distinction between the two types of analysis remains clear; which one of them should be applied to any actual case is an empirical matter. A commodity is a Veblen good if peoples preference for buying it increases as a direct function of its price. ...

The Irish Potato Famine

Potatoes during the Irish Potato Famine were long believed to be the only example of a Giffen good. This theory was debunked by Sherwin Rosen of the University of Chicago in his 1999 paper Potato Paradoxes. Rosen showed that the Giffen phenomenon could be explained by a normal demand model. Starvation during the famine The Irish Potato Famine, also called The Great Famine or The Great Hunger (Irish: An Gorta Mór), is the name given to a famine which struck Ireland between 1846 and 1849. ... Sherwin Rosen was an American labor economist. ... The University of Chicago is a private university located principally in the Hyde Park neighborhood of Chicago, Illinois. ... Sherwin Rosen was a United States labor economist. ...

Gasoline as a possible Giffen good

Sasha Abramsky of The Nation conjectures that for some poor Americans who live far from their jobs, the recent (as of 2005) sharp rise in gasoline prices may make gasoline a Giffen good for certain populations of poor Americans. His model is that they will have to spend money on gasoline that otherwise might go for oil changes, tune-ups, minor repairs, or even to upgrade to more fuel-efficient vehicles. The result is that their "older, less well-maintained cars" will have "decreased gas efficiency", resulting in an increase in gasoline consumption. (Abramsky, 2005, 18) This corresponds to the Giffen model, with maintenance and upgrades constituting the superior goods and gasoline the inferior Giffen good. There is little empirical evidence, however, to support this theory. This article is about the U.S publication. ... 2005 is a common year starting on Saturday of the Gregorian calendar. ...

It is likely that persons of low income and long commutes will change jobs to get shorter commutes, will resort to public transportation, will drastically reduce their use of automobiles for purposes other than commuting, and will reduce purchases of all goods and services other than motor fuels. Some marginal workers may leave the workforce altogether due to resignations and early retirements. Some will move closer to their places of employment, often reversing the tendency of wage workers to move to more distant suburbs from crowded tenements that has existed since the end of the Second World War. It is also likely that employers will be under pressure of supply and demand for labor to increase wages to partially offset increases in an essential cost of reaching one's employment because failure to do so will result in losses of employees. Automobile use will of course be reduced, and with it consumption (in amount, if not in expenditure) of motor fuels and the need for minor repairs and oil changes.

See also

• Supply and demand
• Consumer theory
• Ordinary good
• Inferior good
• Normal good
• Capital good

The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... Consumer theory is a theory of economics. ... An ordinary good is a microeconomic concept used in consumer theory. ... In consumer theory, an inferior good is a good that decreases in demand when the consumers income rises, unlike normal goods, for which the opposite is observed. ... In economics, normal goods are any goods for which demand increases when income increases. ... Capital goods, in contrast to consumer goods, are goods used in the production of (physical) capital. ...

References

• DeGrandpre, R. J., Bickel, W. K., Rizvi, S. A., & Hughes, J. R. (1993). Effects of income on drug choice in humans. Journal of the Experimental Analysis of Behavior, 59, 483-500.
• Abramsky, Sasha. Running on Fumes. [The Nation], October 17, 2005, p.15-19.

External links

• Alfred Marshall Principles of Economics Bk.III,Ch.VI in paragraph III.VI.17
• Jensen, Robert and Nolan Miller. "Giffen Behavior: Theory and Evidence." KSG Faculty Research Working Papers Series RWP02-014, 2002.
• The Last Word on Giffen Goods?