Giffen Goods Meaning
Giffen goods are those, whose demand curve doesn’t 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 demanded are positively related. 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 inferior goods, whose demand falls as soon as the income increases. For example, people would buy more iPhones than the Chinese made the phone 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 x-axis of the graph denotes the quantity demanded of the goods and y-axis denotes the price of the goods. As the price of good increases, the demand for the good also increases, leading to a rightward movement in the demand line and hence the demand line, as shown in the curve below is upward sloping.
Example of Giffen Goods
The concept of Giffen goods can be better understood by a real-life example of food. Let us assume that customer has two options to choose from, viz. Hamburger and potato and a budget of $20 to spend on food. Cost of potato is $ 1.00 and the hamburger is $ 5 each and the customer intends to buy 5 days food from $ 20 he has.
At the given level of prices, the customer will intend to buy 10 potatoes, costing him $ 10 and 2 hamburgers, costing him $ 10. In this way, his consumption would be evenly spread as he could have 2 potatoes each day for 5 days and 2 hamburgers over a period of 5 days. The given quantities ae satisfactory, based on the average consumption of an individual.
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Now, let’s assume that price of potatoes has increased to $ 2.00 and price of hamburger has not changed, customer can still choose to spend $ 10 on buying 2 hamburgers and manage with 5 instead of 10 potatoes, but that would not be sufficient for him and might leave him hungry. Thus, he would rather choose to decrease his consumption of 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 further reduce its consumption of hamburger and allocate his entire budget of $ 20 in buying potatoes. Thus he would be able to buy 8 potatoes in his budget of $ 20 and zero hamburgers and such quantity of potatoes will be sufficient for his requirement.
The following tables summarize the above-given example of hamburger and potatoes:
It is important to note that all Giffen goods are inferior goods, but not all inferior goods are Giffen goods.
Conditions to Categorize Goods as Giffen Goods
There are certain conditions that a good must meet, in order to be categorized as Giffen good:
#1 – It must be an Inferior Good
The foremost 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 an inferior good as compared to hamburger and its consumption has increased with a shortage in budget and an increase in the price of potato.
#2 – Amount Spent on good should be a major portion of the budget
For significant income effect to trigger, the amount spent on such goods should form a major proportion of consumer’s total budget. As in the above example, potato represents 50% of the consumer’s total budget.
#3 – Lack of close substitutes:
In order to maintain/increase the demand for Giffen goods, even at increased prices, there should either be:
- No substitute goods, or
- The price 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 consumer doesn’t shift to another good.
They are goods that are consumed more as their price increases, thus, it shows an upward sloping demand curve and is in contradiction to the law of demand. They are a kind of inferior goods and it is pertinent to mention that all Giffen goods are inferior goods whereas all inferior goods are not Giffen goods.
This has been a guide to Giffen Goods and its meaning. Here we discuss the example of Giffen Goods along with its key characteristics. You can learn more from the following articles –