Giffen Goods: An Invisible Reality!

The existence of Giffen goods is debatable. However, every departure from the law of demand needs some plausible explanation. Such elusive goods are an attempt to justify exemptions to the law of demand.

Price and demand have an inverse relation. An increase in price leads to a rise in demand. However, if demand for a product increase with the rise in price, it generates an exception to the general law of demand.

Some economists term them as a paradox. Some others see such goods existing in theory and imagination. Rober T. Jensen and Nolan H. Miller from Harvard Kennedy School of Public Policy attempt to provide empirical evidence for Giffen behavior. Alfred Marshall observes the phenomenon as a price situation in his “Principles of Economics” (1895):

giffen paradox

“As Mr. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.” (p. 208)

 "Ok, what is in it for me?” you ask.

Jensen and Miller reply: “Understanding this heterogeneity is important for the effective design of welfare programs for the poor.”

They also suggest: “...these goods, and the populations who exhibit Giffen behavior, meet some basic but common conditions that suggest this behavior may be widespread in the developing world.”

They experiment with a subsidy to prove that a decrease in the price of rice leads to a decrease in demand. The consumers allocate their saved real income for meat and better dietary options.

Thus an understanding of the concept and behavior of consumers is essential to envision economic strategies for the poorest segments of society in this highly politicized economic environment.

What are they?

There is no specific good which can be termed as Giffen good. Even Jensen and Miller could not find evidence for their existence. Instead they preferred to term the phenomenon as “Giffen behavior”.

 Michael V. White observes:

“The Jesen and Miller did not provide evidence for a “Giffen good” where at least over a range, the market demand curve slopes upward. Following the previous secondary literature, Jensen and Miller note that the effects of the behavior of the very poor could be swamped in a market, so their results were evidence of “Giffen behavior” and not of a Giffen good.”

 There are basic level staple foods which are strong candidates to be Giffen goods like potatoes’ (Irland famine of the 1940s), rice (as in Jesen & Miller’s paper) and any other basic staple food. Jensen and Miller identify following characteristics of the situation when consumers of basic staple food start behaving differently from the law of economics:

Giffen Goods
  • The households are poor enough that they face subsistence nutrition concerns.
  • They consume a very simple diet including a basic staple food. But can’t be so impoverished that they consume only this basic staple food.
  • The basic staple food is the cheapest source of calories available, comprises a large part of the budget, and has no substitute. There can be no substitution effects.

But a Giffen good can’t be equated to inferior goods. We can find their better at the cost of inferior goods if their price increases. Any basic staple food may become a Giffen good under special circumstances like famine, shortage or extreme price hike.

Descending Voices

This area of microeconomics is not free from descending voices. Prof. Steven N.S. Cheung goes to the extent:

“For a good that is actually transacted in the market, a Giffen good cannot logically exist because someone will bid the price so high that the good will not be traded in the market.” 

However, this statement qualifies for some quick questions:

Why ‘someone’ will bid for Giffen goods if he has resources to transact so big?

Will he do it for his individual demand or for a market demand?

Why does he not go for substitutes? Especially when he can trade the whole volume of the product?

Is law of Demand a Law?

Supply and Demand Model

Origin of Supply and Demand Model

Supply and Demand Lesson

Elasticity Definition

Exceptions to Demand and Supply