Giffen Good - Explained
What is a Giffen Good?
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Table of ContentsWhat is a Giffen Good?Why is a Giffen Good Important?Academic Research on Giffen Goods
What is a Giffen Good?
A Giffen good is any commodity which an upward demand slope. This is quite rare in economics, as people tend to buy more of a product when the price is cheaper than when it is higher. However, for a Giffen good, the reverse is case. A Giffen good is any product which commands a higher demand when the price is increased, and commands a lower demand when the cost is reduced. In most cases, Giffen goods are inferior goods without readily available substitutes. The term Giffen good is gotten from Sir Robert Giffen, a Scottish economist, journalist, and statistician who discovered that there are some products that people are willing to buy more when their prices increase. Although there were different historical discussions about the existence of Giffen goods, modern day examples are quite rare, and this has prompted a lot of debates by theorists on the existence of such products.
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Why is a Giffen Good Important?
A Giffen good is an inferior commodity which defies every rational thing about the demand-price economic model. A Giffen good basically sells a higher volume when the price is increased, and sells a lower volume when the price is reduced. An example would be the case of buying steak versus hamburger when you feel richer. Alfred Marshalls Principle of Economics shows an example of Sir Robert Giffens work using examples from bread and meat. He claimed that bread would increase in price if the people have no money to buy meat. However, George J. Stigler refuted this claim in 1947 in his article titled Notes on the History of the Giffen Paradox. The most recent and famous study on the existence and possibility of Giffen goods was offered by a 2007 study by two Harvard economists: Robert Jensen and Nolan Miller. Both parties conducted a study in China, using rice and wheat which were both dietary staples in the Hunan province and the Gansu province respectively. Different households in these areas were provided with vouchers which subsided the costs of their dietary staples. Results from the study showed that people in the Hunan province bought lesser rice when the price was made lower than when it was increased. The vouchers which helped to subsidizes the price of rice in the Hunan province led to lower demands from households. However, results from the Gansu province was different as lower prices didnt necessarily lead to lower demand as is supposed in basic and rational economics.
Academic Research on Giffen Goods