What is a Giffen Good
A Giffen good is a good 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 quantity demanded for a product falls as the price increases, resulting in a downward slope for the demand curve. A Giffen good is typically an inferior product that does not have easily available substitutes, as a result of which the income effect dominates the substitution effect. Giffen goods are quite rare, to the extent that there is some debate about their actual existence. The term is named after the economist Robert Giffen.
BREAKING DOWN Giffen Good
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 economic terms the income effect dominates the substitution effect.
What came to be named the “Giffen Paradox” was first described by economist Robert Giffen, 1837-1910, economist, statistician, and journalist.
Famed Economist, Alfred Marshall, in his Principles of Economics textbook described Robert Giffen’s work in the context of bread rising in price because people lacked the income to buy meat.
However, the meat-bread example has been questioned since at least 1947 by George J. Stigler in Notes on the History of the Giffen Paradox.
Another example offered of a Giffen good is that of the Irish potato famine of 1845-49. During the famine, as the price of potatoes rose, impoverished consumers had little money left for more nutritious but expensive food items like meat (the income effect). So even though they would have preferred to buy more meat and fewer potatoes (the substitution effect), the lack of money led them to buy more potatoes and less meat. But doubt has been cast on this example because the usual response to scarcity of a good like potatoes would drive prices higher.
The first good example was offered by a 2007 study by Harvard economists Robert Jensen and Nolan Miller. Jensen and Miller conducted a field experiment in two provinces in China – Hunan, where rice is a dietary staple, and Gansu, where wheat is the staple. Randomly selected households in both provinces were given vouchers that subsidized their purchase of the staple food.
The economists 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 rice, while increasing the price by removing the subsidy had the opposite effect. The evidence of wheat in Gansu was weaker because two of the basic conditions for Giffen behavior were not fully observed, meaning that the staple good should have limited substitution, and households should be so poor that they consume only staple foods.