A Giffen good is one whose demand increases as the price increases.
Because of this inverse behavior to normal goods, they do not comply with the normal law of demand , being studied in microeconomics . The law of demand argues that the higher the price of a good, the lower its demand. In the case of Giffen goods there is a paradox that the demand for that good increases when it is more expensive.
This type of asset is directly associated with subsistence assets that need to be consumed by people in situations of extreme poverty and with a very limited economic budget. We refer to goods as basic foods, which in the case of an increase in the price of that good, there is an increase in demand.
Unlike normal goods or lower non-Giffen goods, the demand curve for a Giffen good has a positive slope, where increases in price (P1 and P2) produce increases in demand for the good “x” represented as X1 and X2 . Nowadays, it is considered an atypical behavior of the consumer’s behavior when cataloging as Giffen to certain goods.
Conditions to be considered a good Giffen
Giffen goods must meet three essential conditions to fit into this category:
- The good in question must be an inferior good, which means that said good is most demanded when the income of the consumer is lower (as seen in the previous example).
- The good must represent an important part of the consumer budget or, in other words, it must be almost indispensable for the subsistence of the person who acquires it (as has also been shown with the same explanatory example).
- There must be a shortage of substitute goods. That is, it should not be fulfilled that if the price of one good increases and due to that change the demand for another good increases, it is said that the former is a substitute for the other.
In this regard, two professors from Harvard University, Robert Jensen and Nolan Miller, have continued to investigate the presence of Giffen goods through the consumption of two products – rice and pasta – in two of China’s poorest regions. The method has been to subsidize both goods for some time to evaluate changes in demand derived from changes in prices. The conclusion is that the behavior anticipated by Robert Giffen was observed: the demand for the products increased when the price of rice and pasta increased as a result of the withdrawal of the subsidy.
Example of good Giffen
Below we show several examples by way of question and answer.
Why does demand increase when the price is more expensive?
In this example, an individual who consumes only two products: a basic one such as potatoes and another of a higher category and, therefore, more expensive, such as meat. These two assets account for 100% of the person’s budget.
What would happen if the price of potatoes increases?
According to the law of demand, if the price of a good increases, demand should be reduced. In fact, our friend should consume fewer potatoes because he no longer has enough budget, but obviously he would have to replace the potatoes with another product that allows him to feed himself (such as meat).
However – and this is where we find the paradox of the good Giffen – he has no choice but to replace the meat (since it is still more expensive) with potatoes, in order to compensate for that budget. The end result is that the consumer ends up demanding more potatoes than in the initial situation despite the fact that its price has increased.