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Giffen Goods Meaning
Giffen goods are those whose demand curve does not conform to "the first rule of demand," i.e., price and quantity demanded of Giffen goods are inversely related to each other, unlike other goods, where price and quantity appealed are positively correlated. Therefore, they are inferior goods without a substitute. These are named after the Scottish statistician, Sir Robert Giffen.
The classic example of Giffen goods is the example of bread, which the poor consumed more as its price rose. They are inferior goods, but these are not normal cheap goods whose demand falls as soon as the income increases. For example, people would buy more iPhones than Chinese-made phones when they feel richer. Since the quantity demanded of the Giffen goods increases with an increase in the price of the goods, it leads to an upward sloping demand curve for the Giffen goods.
The demand curve for Giffen goods is given below; the graph's X-axis denotes the quantity demanded of the goods, and the Y-axis represents the price of the goods. As the cost of goods increases, the demand also increases, leading to a rightward movement in the demand line. Hence, the demand line is upward sloping, as shown in the curve below.
Table of contents
- Giffen goods are those whose demand curve does not conform to “the rule of demand,” which is the price and quantity of Giffen goods demand.
- Unlike other goods, where price and quality are positively correlated, Giffen goods are inversely related.
- Giffen goods are substitute goods. In addition, it is named after the Scottish statistician Sir Robert Giffen.
- Certain conditions must meet to be categorized as a Giffen good: the good must be an inferior good, the amount spent on goods must be a significant budget portion, and lack of close substitutes.
Example of Giffen Goods
A real-life example of food can better understand the concept of Giffen goods. Let us assume that the customer has two options to choose from, viz. hamburger and potato, and a budget of $20 to spend on food. The cost of the potato is $1.00, the hamburger is $5 each, and the customer intends to buy five days' food for $20 he has.
The customer intends to buy ten potatoes at the given price level, costing him $10, and 2 hamburgers costing him $10. This way would evenly spread his consumption as he could have two potatoes each day for five days and two hamburgers for five days. Therefore, the given quantities are satisfactory based on the average consumption of an individual.
Now, let us assume that the price of potatoes has increased to $2.00 and the cost of hamburgers has not changed, customers can still choose to spend $10 on buying two hamburgers and manage with five instead of 10 potatoes, but that would not be sufficient for him and might leave him hungry. Thus, he would rather decrease his hamburgers to 1 and increase the number of potatoes to 7.
If potatoes witness a further rise in prices, say to $2.50, the customer would need to reduce their hamburger consumption further and allocate his entire budget of $20 to buy potatoes. Thus, he would be able to buy eight potatoes in his budget of $20 and zero hamburgers, and such a quantity of potatoes will be sufficient for his requirement.
The following tables summarize the above-given example of hamburgers and potatoes: -
It is important to note that all Giffen goods are inferior, but not all are Giffen goods.
Conditions to Categorize Goods as Giffen Goods
There are certain conditions that a good must meet to be categorized as Giffen goods: -
#1 - It must be an inferior good
The initial condition for a good to be categorized as Giffen goods is that its consumption should increase with a decrease in budget. And, when the consumer faces a budget shortage, the consumer will consume more of an inferior good. As in the above-given example, potato is a low good compared to hamburger. Yet, its consumption has increased with a shortage in budget and an increase in potato prices.
#2 - The amount spent on goods should be a major portion of the budget
For a significant income effect to trigger, the amount spent on such goods should form a major proportion of consumers' total budget. As in the above example, potatoes represent 50% of the consumer's total budget.
#3 - Lack of close substitutes
To maintain/increase the demand for Giffen goods, even at inflated prices, there should either be: -
- No substitute goods, or
- The cost of substitute goods should be higher than the current good.
So that current good remains an attractive option even after a price increase in the goods and consumers does not shift to another good.
They are goods that are consumed more as their price increases. Thus, it shows an upward sloping demand curve and contradicts the law of demand. Therefore, they are a kind of inferior goods pertinent to mention that all Giffen goods are common goods, whereas all inferior goods are not Giffen goods.
Frequently Asked Questions (FAQs)
The Giffen goods income effects denote that when the goods price decreases, the buyer’s income increases. The substitution effect displays that when the goods price falls, customers may shift from expensive goods to reasonable ones.
Giffen goods have an upward-sloping demand curve opposite to the basic fundamental laws of demand, which has a downward-sloping demand curve. According to this goods curve, when the price of an inferior good rises, the quantity demanded of that good also rises.
Giffen goods have positive elasticity. Therefore, it has a positive income effect and is stronger than the substitution effect. The elasticity of these goods is often described as being highly price inelastic, which means that changes in the price of the good have only a tiny effect on the quantity demanded.
The indifference curve for Giffen goods states that a consumer of the interest is the same and possesses the same utility.
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