Giffen Good

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

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. 

Giffen Good

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.

Vegetables

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.

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.

Car

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.

What are inferior goods?

In economics, demand for inferior goods decreases as income rises or the economy improves. Therefore, customers will be more willing to pay more for more expensive options if this occurs.

Some elements driving this transition could be quality or a consumer's socioeconomic status change.

Two bags filled with groceries

If a consumer had more wealth, they would demand fewer inferior products, which are the polar opposite of ordinary goods. They may also be associated with those from lower socioeconomic backgrounds.

However, when earnings fall or the economy contracts, demand for inferior items rises. When this happens, lower-cost goods become a more affordable alternative to higher-cost interests.

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

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.

Diamonds

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. 

Perfumes

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.

What is the law of demand?

The subject of economics is concerned with how people use finite resources to meet unlimited desires. The law of demand is concerned with those desires that are limitless. 

Stacking of coins

In their economic behavior, people naturally prioritize more urgent demands and needs over less urgent ones, which extends to how they choose among the limited resources accessible. 

For any economic good, the first unit that a consumer obtains will be used to meet the consumer's most pressing demand that that good can meet.

According to the Law of Demand, the price will rise if there is a limited supply of anything and more people desire it. Similarly, the higher the price of a thing, the less likely it is to be purchased.

Each unit of a given good or service purchased on the market is put to a lower-valued use than the one before; therefore, we may say that each unit is valued less and less.

A downward-sloping market demand curve can be represented by adding all of the units of a good that customers are willing to buy at any given price.

So what changes the demand for a good? Several factors can influence the shape and location of the demand curve. First, as people are willing to spend more, rising salaries tend to raise the demand for ordinary economic commodities. 

Because they may satisfy the same customer desires and needs, the availability of close alternative items that compete with a given economic good will tend to diminish demand for that good. 

Calculating values

In contrast, the availability of closely complementary commodities will tend to raise demand for economic goods because having two interests together, such as cereal and milk, might be even more valuable to consumers than consuming them alone.

Other factors, such as future expectations, changes in background environmental conditions, or changes in an item's actual or perceived quality, can influence the demand curve by altering customer preferences for how the good can be utilized and how urgently it is needed.

Key Takeaways

Food

  • A Giffen good is a low-cost, non-luxury item whose demand rises in lockstep with its price and vice versa.
  • In contrast to the fundamental principles of demand, which are based on a downward-sloping demand curve, the demand curve for such a good is upward-sloping.
  • Any good that increases in demand, even if prices increase, is a Giffen Good. Some common examples are rice, salt, potatoes, and bread.
  • These goods' demand is influenced by a lack of close substitutes and income pressures.
  • Veblen merchandise is similar to Giffen merchandise, except it is more premium.
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Researched and authored by Rhea Rose Kappan | LinkedIn

Reviewed and edited by Ankit Sinha | LinkedIn

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