Information about Giffen good

A Giffen good is an inferior good for which a rise in its price makes people buy even more of the product as a consequence of the income effect. Evidence for the existence of Giffen goods is limited, but there is an economic model that explains how such a thing could exist. Giffen goods are named after Sir Robert Giffen, who was attributed as the author of this idea by Alfred Marshall in his book Principles of Economics.

For most products, price elasticity of demand is negative. In other words, price and demand pull in opposite directions; if price goes up, then quantity demanded goes down, or vice versa. Giffen goods are an exception to this. Their price elasticity of demand is positive. When price goes up, the quantity demanded also goes up, and vice versa. In order to be a true Giffen good, price must be the only thing that changes to get a change in quantity demand, and conspicuous consumption does not enter the picture (such a situation would indicate a Veblen good).

The classic example given by Marshall is of inferior quality staple foods, whose demand is driven by poverty that makes their purchasers unable to afford superior foodstuffs. As the price of the cheap staple rises, they can no longer afford to supplement their diet with better foods, and must consume more of the staple food.

Marshall wrote in the 1895 edition of Principles of Economics:

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.

Giffen goods are also related to experience goods and credence goods in that the two often exhibit increases in demand with price, yet different in that close substitutes are available for the latter types.

Analysis of Giffen goods

There are three necessary preconditions for this situation to arise:

the good in question must be an inferior good,
there must be a lack of close substitute goods, and
the good must constitute a substantial percentage of the buyer's income, but not such a substantial percentage of the buyer's income that none of the associated normal goods are consumed.

If precondition #1 is changed to "The good in question must be so inferior that the income effect is greater than the substitution effect" then this list defines necessary and sufficient conditions. As the last condition is a condition on the buyer rather than the good itself, the phenomenon can also be labeled as "Giffen behavior".

The Giffen Paradox

This can be illustrated with a diagram. Initially the consumer has the choice between spending their income on either commodity Y or commodity X as defined by line segment MN (where M = total available income divided by the price of commodity Y, and N = total available income divided by the price of commodity X). The line MN is known as the consumer's budget constraint. Given the consumer's preferences, as expressed in the indifference curve Io, the optimum mix of purchases for this individual is point A.

If there is a drop in the price of commodity X, there will be two effects. The reduced price will alter relative prices in favour of commodity X, known as the substitution effect. This is illustrated by a movement down the indifference curve from point A to point B (a pivot of the budget constraint about the original indifference curve). At the same time, the price reduction causes the consumers' purchasing power to increase, known as the income effect (an outward shift of the budget constraint). This is illustrated by the shifting out of the dotted line to MP (where P = income divided by the new price of commodity X). The substitution effect (point A to point B) raises the quantity demanded of commodity X from Xa to Xb while the income effect lowers the quantity demanded from Xb to Xc. The net effect is a reduction in quantity demanded from Xa to Xc making commodity X a Giffen good by definition. Any good where the income effect more than compensates for the substitution effect is a Giffen good.

Empirical evidence for Giffen goods

Evidence for the existence of Giffen goods has generally been limited. A 2002 preliminary working paper by Robert Jensen and Nolan Miller of Harvard University made the claim that rice and noodles are Giffen goods in parts of China by tracking prices of goods. A further 2007 working paper by the same authors experimentally demonstrated the existence of Giffen goods among humans at the household level by directly subsidizing purchases of those staples for extremely poor families. It is easier to find Giffen effects where the number of goods available is limited, as in an experimental economy: DeGrandpre et al (1993) provide such an experimental demonstration. In 1991, Battalio, Kagel, and Kogut proved that quinine water is a Giffen good for some lab rats. However, they were only able to show the existence of a Giffen good at an individual level and not the market level.

Giffen goods are difficult to find because a number of conditions must be satisfied for the associated behavior to be observed. One reason for the difficulty in finding Giffen goods is Giffen originally envisioned a specific situation faced by individuals in a state of poverty. Modern consumer behaviour research methods often deal in aggregates that average out income levels and are too blunt an instrument to capture these specific situations. Furthermore, complicating the matter are the requirements for limited availability of substitutes, as well as that the consumers are not so poor that they can only afford the inferior good. It is for this reason that many text books use the term Giffen paradox rather than Giffen good.

Some types of premium goods (such as expensive French wines, or celebrity-endorsed perfumes) are sometimes claimed to be Giffen goods. It is claimed that lowering the price of these high status goods can decrease demand because they are no longer perceived as exclusive or high status products. However, the perceived nature of such high status goods changes significantly with a substantial price drop. This disqualifies them from being considered as Giffen goods, because the Giffen goods analysis assumes that only the consumer's income or the relative price level changes, not the nature of the good itself. If a price change modifies consumers' perception of the good, they should be analysed as Veblen goods. Some economists question the empirical validity of the distinction between Giffen and Veblen goods, arguing that whenever there is a substantial change in the price of a good its perceived nature also changes, since price is a large part of what constitutes a product. However the theoretical distinction between the two types of analysis remains clear; which one of them should be applied to any actual case is an empirical matter.

The Irish Potato Famine

Potatoes during the Irish Potato Famine were long believed to be the only example of a Giffen good. This theory was debunked by Sherwin Rosen of the University of Chicago in his 1999 paper Potato Paradoxes. Rosen showed that the phenomenon could be explained by a normal demand model.

Gasoline as a possible Giffen good

Sasha Abramsky of The Nation conjectured in a 2005 article that gasoline, in certain circumstances, may act as a Giffen good. Increases in gasoline prices, Abramsky argues, may force poor drivers to devote more money to gasoline that they otherwise might have spent on oil changes, tune-ups, minor repairs, or even upgrades to more fuel-efficient vehicles. As a consequence, their "older, less well-maintained cars" may have "decreased gas efficiency", resulting in an increase in gasoline consumption. (Abramsky, 2005, 18) This corresponds to the Giffen model, with maintenance and upgrades constituting the superior goods and gasoline the inferior Giffen good. There is little empirical evidence to support this hypothesis to date, however.

References

DeGrandpre, R. J., Bickel, W. K., Rizvi, S. A., & Hughes, J. R. (1993). Effects of income on drug choice in humans. Journal of the Experimental Analysis of Behavior, 59, 483-500.
Abramsky, Sasha. Running on Fumes. [The Nation], October 17 2005, p.15-19.
Jensen, Robert & Miller, Nolan (2007). Giffen Behavior: Theory and Evidence. NBER Working Paper 13243. http://www.ksg.harvard.edu/nhm/paper_files/Giffen2007.pdf

External links

Types of goods public good - private good - common good - common-pool resource - club good - anti-rival goods rivalrous good and non-excludable good complement good vs. substitute good free good vs. scarce good, positional good (non-)durable good - intermediate good (producer good) - final good - consumer good - capital good
inferior good - normal good - ordinary good - Giffen good - luxury good - Veblen good - superior good
search good - (post-)experience good - merit good - credence good - demerit good

In consumer theory, an inferior good is a good that increases in demand when the consumers income falls, unlike normal goods, for which the opposite is observed. Inferiority, in this sense, is an observable fact rather than a statement about the quality of the good.
..... Click the link for more information.

price is the assigned numerical monetary value of a good, service or asset.

The concept of price is central to microeconomics where it is one of the most important variables in resource allocation theory (also called price theory).
..... Click the link for more information.

Economics is the social science that studies the production, distribution, and consumption of goods and services. The term economics comes from the Greek for oikos (house) and nomos (custom or law), hence "rules of the house(hold).
..... Click the link for more information.

Sir Robert Giffen (1837 – April 12 1910), was a British statistician and economist. He was born at Strathaven, Lanarkshire.

He entered a solicitor's office in Glasgow, and while in that city attended courses at the university.
..... Click the link for more information.

Alfred Marshall (July 26 1842–July 13 1924), born in Bermondsey, London, England, became one of the most influential economists of his time. His book, Principles of Economics
..... Click the link for more information.

Principles of Economics (Grundsätze der Volkswirtschaftslehre) is a book by economist Carl Menger which is credited with the founding of the Austrian School of economics.
..... Click the link for more information.

In economics and business studies, the price elasticity of demand (PED) is an elasticity that measures the nature and degree of the relationship between changes in quantity demanded of a good and changes in its price.
..... Click the link for more information.

supply and demand describe market relations between prospective sellers and buyers of a good. The supply and demand model determines price and quantity sold in the market.
..... Click the link for more information.

Conspicuous consumption is a term used to describe the lavish spending on goods and services that are acquired mainly for the purpose of displaying income or wealth. In the mind of a conspicuous consumer, such display serves as a means of attaining or maintaining social status.
..... Click the link for more information.

Veblen goods if people's preference for buying them increases as a direct function of their price.

It is claimed that some types of high-status goods, such as expensive wines or perfumes, are Veblen goods, in that decreasing their prices decreases
..... Click the link for more information.

A staple food is a food that forms the basis of a traditional diet, particularly that of the poor. Staple foods vary from place to place, but are typically inexpensive starchy foods of vegetable origin that are high in food energy (Calories) and carbohydrate and that can be stored
..... Click the link for more information.

The introduction to this article may be too long. Please help improve the introduction by moving some material from it into the body of the article according to the suggestions at Wikipedia's .
..... Click the link for more information.

In economics, an experience good is a product or service where product characteristics such as quality or price are difficult to observe in advance, but these characteristics can be ascertained upon consumption.
..... Click the link for more information.

A credence good is a term used in economics for a good whose utility impact is difficult or impossible for the consumer to ascertain. In contrast to experience goods, the utility gain or loss of credence goods is difficult to measure after consumption as well.
..... Click the link for more information.

In economics, one kind of good (or service) is said to be a substitute good for another kind insofar as the two kinds of goods can be consumed or used in place of one another in at least some of their possible uses.
..... Click the link for more information.

In economics, normal goods are any goods for which demand increases when income increases, i.e. with a positive income elasticity of demand. The term does not necessarily refer to the quality of the good.
..... Click the link for more information.

An indifference curve in microeconomic theory is a graph showing different bundles of goods, each measured as to quantity, between which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one bundle over another.
..... Click the link for more information.

Relative price is the price of a commodity such as a good or service in terms of another; ie, the ratio of two prices. A relative price may be expressed in terms of a ratio between any two prices or the ratio between the price of one particular good and a weighted average of all
..... Click the link for more information.

Harvard University (incorporated as The President and Fellows of Harvard College) is a private university in Cambridge, Massachusetts, USA and a member of the Ivy League.
..... Click the link for more information.

RICE is a treatment method for soft tissue injury which is an abbreviation for Rest, Ice, Compression and Elevation.^[1]^[2]^[3] When used appropriately, recovery time is usually shortened and discomfort minimized.
..... Click the link for more information.

A noodle is made from unleavened dough that has been shaped into thin flat strips or round cylinders and cooked in a boiling liquid. Depending upon the type, noodles may be dried or refrigerated before cooking.
..... Click the link for more information.

This page contains Chinese text.
Without proper rendering support, you may see question marks, boxes, or other symbols instead of Chinese characters.

China (Traditional Chinese:
..... Click the link for more information.

Aspinwall Classification System (Leo Aspinwall, 1958) classifies and rates products based on five variables:

Replacement rate (How frequently is the product repurchased?)
Gross margin (How much profit is obtained from each product?)

..... Click the link for more information.

Great Irish Famine (known as The Great Hunger, An Gorta Mór in Irish, or An Drochshaol, the Bad Life), refers to a famine, and its aftermath, in Ireland between 1845 and 1851.
..... Click the link for more information.

Sherwin Rosen (1938–2001) was an American labor economist. He had ties with many American universities and academic institutions including the University of Chicago, the University of Rochester, Stanford University and its Hoover Institution.
..... Click the link for more information.

The University of Chicago is a private university located principally in the Hyde Park neighborhood of Chicago. Founded in 1890 by the American Baptist Education Society and the oil magnate John D. Rockefeller, the University of Chicago held its first classes on October 1, 1892.
..... Click the link for more information.

Type Weekly Political Magazine
Format Magazine

Owner The Nation Company L.P.
Editor Katrina vanden Heuvel
Founded July 1865
Political allegiance Progressive, Liberal
Headquarters 33 Irving Place
New York, New York 10003
..... Click the link for more information.

Giffen Good