Giffen Good

A non-luxury, low-cost item that defies standard economic and consumer demand assumptions

Author: Osman Ahmed
Osman Ahmed
Osman Ahmed
Investment Banking | Private Equity

Osman started his career as an investment banking analyst at Thomas Weisel Partners where he spent just over two years before moving into a growth equity investing role at Scale Venture Partners, focused on technology. He's currently a VP at KCK Group, the private equity arm of a middle eastern family office. Osman has a generalist industry focus on lower middle market growth equity and buyout transactions.

Osman holds a Bachelor of Science in Computer Science from the University of Southern California and a Master of Business Administration with concentrations in Finance, Entrepreneurship, and Economics from the University of Chicago Booth School of Business.

Reviewed By: Manu Lakshmanan
Manu Lakshmanan
Manu Lakshmanan
Management Consulting | Strategy & Operations

Prior to accepting a position as the Director of Operations Strategy at DJO Global, Manu was a management consultant with McKinsey & Company in Houston. He served clients, including presenting directly to C-level executives, in digital, strategy, M&A, and operations projects.

Manu holds a PHD in Biomedical Engineering from Duke University and a BA in Physics from Cornell University.

Last Updated:November 9, 2023

What is a Giffen Good?

A Giffen good is a non-luxury, low-cost item that defies standard economic and consumer demand assumptions. When the price of such goods goes up, demand goes up, and when it goes down, the market goes down.

In economics, this results in an upward-sloping demand curve, whereas the fundamental laws of demand result in a downward-sloping demand curve.

The phrase "Giffen products" was coined in the late 1800s and is named after Sir Robert Giffen, a well-known Scottish economist, statistician, and journalist. This good is a notion that focuses on low-cost, non-luxury products with few close replacements or substitutes. 

Giffen commodities include bread, rice, and wheat. These are essential requirements for which few near-dimensional alternatives are available at comparable prices.

In economics, such goods are exceptional because their supply and demand are opposed to traditional understanding. They can originate from various market variables, including supply, demand, pricing, income, and substitution.

All these variables are used in the primary supply and demand economics theories. For example, a Giffen good is a low-cost, non-luxury item whose demand rises in lockstep with its price, and vice versa.

Key Takeaways

  • Giffen goods are low-cost items whose demand rises when prices increase, defying standard economic logic.
  • Giffen goods defy the traditional law of demand, exhibiting an upward-sloping demand curve. This unique characteristic is due to a lack of close substitutes and income pressures, leading consumers to buy more even at higher prices.
  • Giffen goods differ from classic inferior goods in that their demand increases even when prices rise, regardless of consumers' income levels. This phenomenon occurs because there are no close replacements for Giffen products, forcing consumers to continue purchasing them despite price hikes.
  • Giffen goods challenge traditional supply and demand principles, emphasizing the significance of income and substitution effects in shaping consumer choices.

What is the demand curve for Giffen?

In contrast to the fundamental principles of demand, which are based on a downward-sloping demand curve, the demand curve for a Giffen good is upward-sloping. Giffen goods' market is influenced by a lack of close substitutes and income pressures.

Giffen products are comparable to Veblen goods, which challenge conventional economic and consumer demand theory while focusing on luxury goods. Veblen goods are similar to Giffen goods, except they are more premium.

The income effect might be significant in the case of such goods, while the substitution effect is equally significant. The demand curve for Giffen items is upward sloping, indicating more demand at higher prices. 

Because there are few substitutes for Giffen items, buyers will continue to buy them even if the price rises. Therefore, Giffen commodities are frequently necessary, incorporating income and higher price replacement effects.

Consumers are prepared to spend more for such goods since they are essential, but this limits discretionary cash, making slightly higher options much more out of reach.

As a result, customers purchase even more Giffen products. In general, both the income and substitution effects are at work to produce unusual supply and demand outcomes.

It's worth noting that while all Giffen commodities are inferior goods, not all defective goods are Giffen.

Giffen Good Vs. inferior goods

The demand for inferior items frequently dictates consumer behavior. In most cases, the market for defective items is driven by lower-income people or when the economy is contracting. That isn't always the case, though. 

Some clients may not be willing to change their ways and will continue to buy inferior goods.

The main difference between Giffen and classic inferior goods is that demand for the former grows even when prices rise, regardless of a consumer's income.

Many Giffen products are considered essentials, particularly in locations where people are of lower socioeconomic status. 

When the costs of Giffen products rise, customers have no choice but to spend more money on them. As a result, people may spend more money on rice since it is the only thing they can afford—even if the price continues to rise. 

Meat becomes a luxury item because it is simply too expensive and out of reach.

The following is a list of the significant differences between Giffen and inferior goods:

  • Inferior goods are those whose demand falls as the consumer's income rises above a certain threshold. Conversely, these goods are goods whose demand grows in response to price increases. 
  • There are no close replacements for Giffen products. But, on the other side, inferior goods have better-quality alternatives.
  • These goods defy the law of demand. Therefore, as prices decline, the overall price effect will be negative in the case of such goods. In the case of defective items, however, the price effect would be positive as prices fell.
  • The demand curve for Giffen goods is upward sloping, but for inferior goods, it is downward sloping.

Giffen Goods vs. Veblen Goods

Although the names Giffen and Veblen goods are frequently used interchangeably, there is a subtle but substantial distinction between them. Let's take a closer look at each notion to uncover this distinguishing feature.

Giffen goods are low-cost items whose demand rises in tandem with their price. There are just a few alternatives for these things required to provide the need for food.

The concept of Giffen goods subverts the fundamental logic of supply and demand.

Veblen goods are high-quality luxury items whose demand rises in tandem with their price. So naturally, the exclusivity of these things is to blame for this. 

Sports cars, expensive accessories (diamond rings, watches, necklaces), premium couture apparel, and so forth are examples. 

The exclusivity of these things symbolizes a person's achievement and riches. Therefore, Veblen items are targeted at wealthy clients who can afford to buy from companies associated with luxury, exclusivity, and wealth.

Said, both Giffen and Veblen commodities violate the widely held law of supply and demand, resulting in a unique demand curve. These goods have an upward-sloping curvature. When the price of a thing rises, so does the need for it. 

The fundamental distinction between the two is that Giffen goods are focused on low-cost items, while Veblen goods are concentrated on luxury, exclusive, and premium items. 

Income and substitution effects are essential in explaining the econometrics of the upward sloping demand curve for Giffen products.

Veblen goods also have an upward sloping demand curve, but with notable differences in the influences. Perfumes promoted by celebrities or premium wines are two examples. 

The high price of these commodities is associated with a high social standing signal. As a result, these things are more desirable to high-income consumers at a higher cost. However, because income isn't a factor in these commodities, the income effect has less influence. 

Because the commodities are primarily status symbols and not cross-dimensional, substitution is also a minor factor.

Researched and authored by Rhea Rose Kappan | LinkedIn

Reviewed and edited by Ankit Sinha | LinkedIn

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