Giffen goods are products or services in which demand increases even as prices increase, due to the appreciation of consumers for good, and demand falls when prices decrease.
In general, they are goods considered inferior, in which there are no close substitutes, or that people buy less when their income increases.
Examples of Giffen Goods
Examples of Giffen’s goods can happen with products like rice or beans, in which the price reduction and a larger surplus of the household budget causes a reduction in demand.
In a 2007 study, Harvard economists Robert Jensen and Nolan Miller found evidence of this behavior in a Chinese province. In the study, there was a reduction in the price of rice when it was subsidized, and even then there was a reduction in demand from consumers.
In the case of a common good, the price reduction should lead to an increase in demand, which is not the case with Giffen goods.
Despite being a widely discussed topic, real examples in which this happens are extremely rare and common behavior is dictated by the Law on Demand.
Giffen goods concept
The term “Giffen’s Goods” was named after Scottish economist, statistician and journalist Robert Giffen, who formulated the idea.
This behavior on the part of consumers is different from the common one, where an increase in the price of a good causes a decrease in the quantity sought.
The goods that follow this behavior are considered basic and are related to factors other than prices, such as consumer income, for example.
Giffen Goods and Veblen Goods
As much as Giffen’s goods, Veblen’s goods also differ from the Law of Demand in terms of the behavior of demand with rising prices.
While Giffen’s Good Theory deals with basic goods and for low-income consumers, Veblen’s Good deals with consumers looking for luxury products.
According to Thorstein Veblen’s idea, luxury goods are more desired as prices rise, demonstrating value to products. In both theories there is a positive slope in the demand curve, which shows an increase in quantity with an increase in price, or vice versa.