What Is a Giffen Good?

A Giffen good is a product for which demand increases as the price increases and falls when the price decreases. A Giffen good has an upward-sloping demand curve, which is contrary to the fundamental law of demand, which states that the quantity demanded for a product falls as the price increases, resulting in a downward slope for the demand curve. Generally speaking, Giffen goods are typically inferior products that do not have readily available substitutes.

The term "Giffen good" was coined in the late 1800s, named after noted Scottish economist, statistician, and journalist Sir Robert Giffen. But despite the historical discussion about the Giffen goods phenomenon, actual examples are quite rare, to the extent that some theorists debate their actual existence.

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Giffen Good

Understanding Giffen Goods

A Giffen good is a special case of an “inferior good” of which people buy less when their income rises. For example, people buy more steak than hamburger, when they feel richer.

In his textbook "Principles of Economics," economist Alfred Marshall described Robert Giffen’s work in the context of bread rising in price because people lacked the income to buy meat. However, in 1947, the meat-bread example was challenged by George J. Stigler in his article "Notes on the History of the Giffen Paradox."

The most viable example of the existence of a Giffen good was offered by a 2007 study authored by Harvard economists Robert Jensen and Nolan Miller, who conducted a field experiment in the Hunan province of China, where rice is a dietary staple, and in the Gansu province, where wheat is the staple. Randomly selected households in both provinces were given vouchers that subsidized the purchase of their respective staple foods.

Key Takeaways

  • A Giffen good is a product for which demand increases as the price increases and falls when the price decreases.
  • A Giffen good has an upward-sloping demand curve, which is contrary to the fundamental law of demand, which states that the quantity demanded for a product falls as the price increases, resulting in a downward slope for the demand curve.
  • A Giffen good is a special case of an “inferior good” that people purchase less often when their income rises. For example, people buy more steak than hamburger, when they feel richer.

Jensen and Miller found strong evidence of Giffen behavior exhibited by Hunan households with respect to rice. Lowering the price of rice through the subsidy caused reduced demand by households for the rice while increasing the price by removing the subsidy had the opposite effect. However, the evidence of wheat in Gansu was weaker.

Some premium products may be Giffen goods, such as celebrity-endorsed perfumes and fine wines, because when the price of these items drops, so does their perceived high status, which ultimately depresses their demand.