Good giffen

economic-dictionary

A Giffen good is one whose demand increases as the price increases.

Due to this inverse behavior to normal goods, they do not comply with the normal law of demand, being studied in microeconomics. The law of demand holds that the higher the price of a good, the lower its demand. In the case of Giffen goods, the paradox arises that the demand for this good increases when it is more expensive.

This type of good is directly associated with subsistence goods that people who are in situations of extreme poverty and with a very limited economic budget need to consume. We refer to goods as basic foodstuffs, which in the event that there is an increase in the price of that good, there is an increase in its demand.

Unlike normal goods or inferior non-Giffen goods, the demand curve for a Giffen good is upward sloping, where increases in price (P1 and P2) produce increases in demand for the good "x" represented as X1 and X2 . Usually, it is considered an atypical behavior of the consumer behavior when cataloging certain goods as Giffen good.

Conditions for it to be considered a Giffen good

Giffen goods must meet three prerequisites to fit into this category:

  • The good in question must be an inferior good, which means that said good is more in demand when the consumer's income is lower (as seen in the previous example).
  • The good must represent an important part of the consumer's budget or, in other words, it must be almost indispensable for the subsistence of the person who acquires it (as has also been demonstrated with the same explanatory example).
  • There must be a shortage of substitute goods. That is, it should not be true that if the price of a good increases and due to that change the demand for another good increases, it is said that the first is a substitute for the other.

In this sense, two Harvard University professors, Robert Jensen and Nolan Miller, have continued to investigate the presence of Giffen goods through the consumption of two products - rice and pasta - in two of the poorest regions of China. The method has consisted of subsidizing both goods for a certain time in order to assess changes in demand resulting from changes in prices. The conclusion is that the behavior anticipated by Robert Giffen was observed: the demand for the products increased when the price of rice and pasta increased as a consequence of the withdrawal of the subsidy.

Well Giffen example

Below we show several examples by way of question and answer.

Why does demand increase when the price is more expensive?

In this example, an individual who consumes only two products: a basic one such as potatoes and another of a higher category and, therefore, more expensive, such as meat. These two assets represent 100% of the person's budget.

What would happen if the price of potatoes increases?

According to the law of demand, if the price of a good increases, the demand should decrease. In fact, our friend should consume less potatoes because he no longer has enough budget, but obviously he would have to substitute the potatoes for another product that allows him to eat (such as meat).

However - and it is at this point where we find the paradox of the good giffen - he has no choice but to substitute potatoes for meat (since it is still more expensive), in order to compensate for that budget. The end result is that the consumer ends up demanding more potatoes than in the initial situation despite the fact that their price has increased.

Good normal

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