Believe it or not, there have been a couple of products in the world that have experienced increased demand with increased price. Learn how this happens in this lesson.
Definition of Giffen Goods
If you saw a food item on the shelf on Monday that was a dollar a piece, you might buy one. On Tuesday, if you saw it was now two dollars, can you imagine yourself actually buying more? This scenario exists!
Believe it or not, a Giffen good is one of those freak products from economics class where the demand for the product rises when the price of the product also rises. This goes against the law of demand, which is a downward curve where the demand for the product decreases with increasing price. Giffen goods are inferior or basic products, not any kind of luxury item. As strange as it sounds, there are real world examples of Giffen goods, as you will hear about in this lesson.
The Demand Curve
When a Giffen good is involved, this downward curve becomes an upward curve like this:
The y axis is demand; the x axis is price. You can see that as you travel to the right on the graph (your price getting higher), the demand for the product increases (your graph goes upward).
Just think, if you created a Giffen good, all you would have to do is to increase your price and all of a sudden more people would purchase your product. Your profits would rise substantially. For most products in the economic world, if you raise your prices, demand for your product would decrease.
Conditions for a Giffen Good
But, there is a catch. Not all products turn in to Giffen goods. A product can become a Giffen good only when certain conditions are met. What are these conditions?
- The product must be a staple product such as food that has a limited number of substitutions available. For example, cheap rice doesn't have that many available substitutions in its price range. Quinoa is more expensive, so that can't be a substitute.
- The customers must be poor enough that they can't afford to substitute the staple product for higher quality products. This means that the poor customers have to choose the staple product.
Examples of Giffen Goods
You might think that such a product can't possibly be real, but there have actually been two real notable Giffen goods in the world.
An old example is of the famous Irish potato famine of the 1800s. The two conditions for a Giffen good were met. First, there weren't that many substitutes for cheap potatoes. Second, the people didn't have enough money to purchase more expensive items. So, as the price of potatoes went up, the poor didn't have money to purchase other things like meat, so they had to purchase more potatoes just to get full.
However, the fact that there was a famine going on means the potatoes themselves were experiencing a blight. This means that the population was unlikely able to buy more potatoes, so this example is not usually used anymore to describe a Giffen good, but you get the idea. Let's go to a more fitting example.
The second example is actually a study done by a couple economists, Robert Jensen and Nolan Miller. These economists went to China to study how people would react when they have more money versus when they don't.
They were looking at how much rice the people would purchase depending on their income. They found that when people had more money to spend, they actually started to buy less rice and purchase more expensive items like meats.
But when people had less money, they ended up purchasing even more rice when the price of rice started to rise. Why? Because when the price of rice increased, these people didn't have money to buy the other more expensive items like meat. So, since they didn't have meat to fill themselves up with, they had to buy even more rice to make up for it. Thus you see a Giffen good in action. As rice prices rise, so does consumption and demand.
Let's review. A Giffen good is one where the demand for the product rises when the price of the product also rises. This goes against the law of demand where, when the price rises, demand decreases. So, a Giffen good has a demand curve that is rising instead of falling.
In order for a product to become a Giffen product, it must meet two conditions:
- The product must be a staple product with few substitutions
- The customers must be poor enough so they can only afford the cheap staple product or another cheap alternative
In the real world, the two Giffen goods that are usually given as examples are the potatoes in the Irish potato famine of the 1800s (now somewhat dismissed due to the famine circumstance) and rice in the studies by Robert Jensen and Nolan Miller in China.