Giffen Good

Definition

Giffen goods are low-income, non-luxury products that defy standard economic and consumer demand theories. The demand for Giffen goods increases as their prices rise and decreases as their prices fall. In econometrics, this results in an upward-sloping demand curve, contrary to the basic law of demand, which typically slopes downward.

Origin

The term "Giffen goods" was coined in the late 19th century, named after Sir Robert Giffen, a renowned Scottish economist, statistician, and journalist. The concept of Giffen goods focuses on low-income, non-luxury items that have few close substitutes.

Categories and Features

Giffen goods are typically essential items such as bread, rice, and wheat. These goods have few close substitutes at the same price level. A notable feature of Giffen goods is their positive correlation between demand and price, which is contrary to the demand law for most goods.

Case Studies

A classic example of a Giffen good is the potato in 19th-century Ireland. When potato prices rose, low-income families bought more because they could not afford other more expensive foods. Another example is rice in certain regions of China, where an increase in rice prices might lead consumers to buy more rice as they cut back on more expensive alternatives.

Common Issues

Investors might misunderstand the demand law for Giffen goods, assuming that price increases lead to decreased demand. In reality, the demand law for Giffen goods is the opposite. Additionally, the conditions for the existence of Giffen goods are very specific, typically requiring low income and a lack of substitutes.