For most products, price elasticity of demand is negative. In other words, price and demand pull in opposite directions; price goes up and 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 demand.
The classic example given by Marshall is of inferior quality staple foods whose demand is driven by poverty, which 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.
- The good in question must be an inferior good,
- There must be a lack of close substitutes,
- And the good must comprise a substantial percentage of the buyers income.
The Giffen Paradox
Despite years of searching, no generally agreed upon example has been found. A 2002 preliminary working paper by Robert Jensen and Nolan Miller made the claim that rice and noodles are Giffen goods in parts of China. 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. 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. 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, since the nature of the high status good changes significantly with a substantial price drop, these goods are not considered to be Giffen goods, but rather to be Veblen goods. This distinction is maintained by the assumption (some would say fictitious assumption) that a change in the price of non-Veblen goods will not significantly change the perceived nature of the good itself.
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