written by | April 14, 2022

What are Giffen Goods?

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The name "Giffen" comes from Sir Robert Giffen, a Scottish statistician who was the inspiration for it. Among the Giffen goods, staple foods are bread; as the price of bread rose, the poor ate an increasing amount as a result. The fact that these are not your normal low-cost things that lose their appeal when people's wages rise must be kept in mind. According to the survey, people who believe themselves to be wealthy are more likely to buy iPhones than they are to purchase Chinese-made smartphones. As the price of Giffen commodities rises, the demand for Giffen goods rises in proportion, resulting in an upward-sloping demand curve for Giffen items.

An established economic theory states that when the price of a Giffen goods product rises, customers are more likely to increase their commodity usage. It is against the fundamental principles of supply and demand when the demand for Giffen goods rises due to a decrease in supply.

However, not all Giffen products are subpar; in some instances, the opposite is true. This is something you should be aware of as a matter of course. Customers enjoy Giffen goods’ bread, rice, and wheat products, which are available in a variety of flavours. However, even though these are typical specifications, there are just a handful of comparable goods available at a similar price.

Did you know?

While still alive in the late 1800s, Sir Robert Giffen, a well-known Scottish statistician and economist, invented the phrase "Giffen goods," which means "Giffen products." There are only a few reasonably priced, non-luxury alternatives to Giffen items available on the market today. It is the creations of Giffen that call into doubt Veblen's economic and consumer demand theories, as they set a premium on luxury products. 

Understanding Giffen Goods

When it comes to economics, the supply and demand for Giffen items is an extremely rare phenomenon. There are a variety of market dynamics that can influence the development of Giffen goods products, including supply, demand, pricing, income, and substitution. These variables all impact the fundamental theories of supply and demand economics. It is observed that the demand curve for low-priced, non-luxury commodities slopes upward when these qualities are taken into consideration.

  • In order for product demand to increase, the price of Giffen goods must rise as well, and vice versa.
  • The demand curve for Giffen goods slopes upward, in contravention of the fundamental rules of demand, which expect a downward demand curve for this type of good.
  • The absence of close substitutes, as well as economic considerations, have a significant impact on the demand for Giffen products.
  • When compared to Giffen items, Veblen products concentrate a greater emphasis on high-end goods and services.

Also Read: List Of Goods Exempted Under GST in India with HSN Code

Supply and Demand of Giffen Goods

The rules of supply and demand control economics. As prices rise, demand falls, resulting in a downward-sloping market curve. We can expect an upward-sloping curve in the demand-supply relationship as prices fall. As previously noted, money has the capacity to slightly flatten these curves, as increasing personal income may result in a range of diverse behavioural effects. There may be a significant substitution effect in addition to direct substitution. The substitution effect adds support to the basic economic theory of supply and demand because most items may be replaced.

There are substantial repercussions for the consumer's income and substitution when purchasing Giffen products. There is a higher demand for more expensive Giffen goods commodities due to the upward demand curve. Even if Giffen's prices have gone up, customers continue to buy the goods because there aren't any alternatives. The income effect and higher price substitution effect of Giffen commodities, which are often essential, are combined. Although consumers are prepared to pay a premium for Giffen goods products, even the somewhat more expensive options are increasingly out of their reach because of their limited financial means. Giffen's product has seen an increase in sales as a result. Unexpected outcomes have been caused by an intricate interplay between income and substitution effects.

Historical Research and Giffen goods Examples

Sir Robert Giffen's name was first associated with "Giffen goods " in the late nineteenth century when the company was founded. Giffen products are in violation of the principle of supply and demand. He was a skilled economist and statistician who possessed exceptional abilities. In the third edition of Principles of Economics, Alfred Marshall, a well-known economist, claimed that people continued to consume bread because it was the most cost-effective alternative. However, the price of bread had grown.

According to the findings of the study, low-cost items exist that are in direct opposition to conventional product demand assumptions. There are few examples of Giffen goods if any, alternatives for these things, which are not typically considered to be luxury items in the traditional sense. Examples of Giffen goods are sales of bread, rice, and wheat increase when the price of these commodities rises and decrease when the price of these commodities falls, as shown in the chart below.

In his textbook Principles of Economics, Alfred Marshall characterised Robert Giffen's work in terms of rising bread prices due to people not having enough money to purchase meat.

In his 1947 article "Notes on the History of the Giffen Paradox," George J. Stigler, to his credit, presented a counter-example to the meat-and-bread example that was successful. In a field experiment, Harvard University researchers Robert Jensen and Nolan Miller travelled to China's Hunan province, where rice is a primary food source, and China's Gansu province, where wheat is a staple food source. Each province distributed vouchers to randomly selected households in order to subsidise the purchase of basic goods and services. It was observed in Hunan houses, according to Jensen and Miller, that Giffen-like behaviour was present. Because of price decreases in response to subsidy elimination, household demand for rice decreased, whereas an increase in rice prices as a result of subsidy elimination had the opposite impact. Gansu, on the other hand, showed little signs of wheat production.

Also Read: Place of Supply of Goods under GST

Giffen Goods vs Veblen Goods

Giffen goods and Veblen goods are sometimes used interchangeably. However, there is a minor yet significant difference. Consider each of these ideas in further detail so that you can see how unique they are.

As the price of Giffen goods rises, so makes consumer demand. Our basic dietary needs can only be met by a limited number of alternatives to these commodities. Bread and rice are two examples of Giffen commodities. Demand for Giffen products is being slashed as a result.

The price of Veblen goods, which are high-quality, premium goods, grows in parallel with demand. Since these things are in short supply, this is why they are so expensive. A few examples include sports cars, expensive jewellery (diamond rings, watches, necklaces), and haute couture clothing. Those who are wealthy and successful can be judged on the exclusivity of their possessions. As a result, Veblen goods producers target wealthy customers who can afford to buy things associated with exclusivity and luxury.

 Neither the Giffen goods nor the Veblen goods are in accordance with the classical rule of demand and produce a distinct curve on the demand graph. The demand for these items is increasing, which is reflected in their increased sales. Consumer demand rises in tandem with product prices. One key difference between Giffen and Veblen goods is that Giffen goods focus on low-cost products, whereas Veblen goods focus on luxury, unique, and premium items. 

In both the Giffen goods and Veblen products, supply and demand break the accepted standards. Both Giffen and Veblen products have an upward sloping demand curve. Giffen's upward demand curve can be described by income and substitution econometrics. 

Although the demand curve for Veblen goods has an upward slope, it is affected by a variety of factors. Veblen goods are high-end, high-end commodities. Perfumes promoted by celebrities or expensive wines are examples of this. The high price of these goods is seen as an indication of great social status. This means that high-income buyers find these things more appealing at a higher cost. Because income is not a factor, the income effect has little effect on these commodities. Due to their status and lack of cross-dimensionality, substitution is a restricted factor.

Conclusion

In contrast to the "first law of demand," prices for Giffen commodities decrease in lockstep with demand. This means that the relationship between prices and quantities sought is reversed. As a result, Giffen goods are worthless until an economically good substitute can be developed. The supply and demand for Giffen items is an extremely rare phenomenon. There are a variety of market dynamics that can influence the development of Giffen products. The demand for these items is increasing, which is reflected in their increased sales. Since these things are in short supply, this is why they are so expensive. A few examples include sports cars, diamond rings, and haute couture clothing. The demand curve for Veblen goods has an upward slope, and it is affected by a variety of factors. Giffen goods are low-priced products with increasing demand as their price increases. The high price of these goods is seen as an indication of great social status.

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FAQs

Q: Who gave the concept of Giffen goods?

Ans:

Sir Robert Giffen was the first to introduce the term "Giffen goods" in the late 1800s. Among his many accomplishments, he introduced the notion of Giffen goods that violated the law of demand.

Q: What is the difference between Giffen goods and Veblen goods?

Ans:

A Veblen good is typical of high quality and highly coveted, in contrast to a Giffen good, which is of inferior quality and cannot be easily replaced. Wheat, rice, potatoes, etc., are examples of Giffen goods, while luxury watches, luxury cars, etc., are examples of Veblen goods.

Q: What are the examples of Giffen goods?

Ans:

Rice, potatoes, bread, etc., are some of the examples of Giffen goods.

Q: What are Giffen goods?

Ans:

Giffen goods are the goods whose demand increases in response to an increase in their price and vice versa.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.