Thursday, December 8, 2022

What are Giffen Goods?

What are Giffen Goods?

 In economics and consumer theory, a Giffen good is a product that people consume more of as the price rises and vice versa—violating the basic law of demand in microeconomics. For any other sort of good, as the price of the good rises, the substitution effect makes consumers purchase less of it, and more of substitute goods; for most goods, the income effect (due to the effective decline in available income due to more being spent on existing units of this good) reinforces this decline in demand for the good. But a Giffen good is so strongly an inferior good in the minds of consumers (being more in demand at lower incomes) that this contrary income effect more than offsets the substitution effect, and the net effect of the good’s price rise is to increase demand for it. Also known as Giffen paradox. A Giffen good is considered to be the opposite of an ordinary good. Giffen goods are named after Scottish economist Sir Robert Giffen, to whom Alfred Marshall attributed this idea in his book Principles of Economics, first published in 1890. Some suggest that a number of other goods, such as crypto currencies like Bit coin, rising prices on which fuels further demands,[13]might be Giffen. Given limited supply of crypto currencies due to costly currency mining in time, resources and electricity, in relation to the supply curve of potatoes, the curve for bit coins could be very inelastic as well. While the arguments are theoretically sound (i.e., they accord with Marshall’s basic intuition), in each case the supporting empirical evidence has been found unconvincing.[14]As with the Great Famine in Ireland, the emergence of new crypto currency and advanced technologies on mining currencies would push back the value of bit coins. Besides, hackers could be a potential threat to the value of crypto currencies, which would break the situation.

Anthony Bopp (1983) proposed that kerosene, a low-quality fuel used in home heating, was a Giffen good. Schmuel Baruch and Yakar Kanai (2001) suggested that shochu, a Japanese distilled beverage, might be a Giffen good. In both cases, the authors offered supporting econometric evidence. However, the empirical evidence has been generally considered incomplete. In a 2005 article, Sasha Abramsky of The Nation conjectured that gasoline, in certain circumstances, may act as a Giffen good. However, no supporting evidence was offered, and evidence from the large increases in oil prices in 2008 would suggest that quantity demanded for gasoline did actually fall as a result of increased prices.[15] Of course, the lack of evidence at the aggregate level does not rule out that the proposed goods may have been Giffen for certain groups of consumers—in particular for poor consumers. As shown by Hildenbrand’s model, the aggregate demand will not exhibit any Giffen behaviour even when we assume the same preferences for each consumer, whose nominal wealth are uniformly distributed on an interval containing zero. This explains the presence of Giffen-like behaviour for individual consumers but the absence of aggregate data.

CA Divya Thakkar
Chartered accountant | IIM Bangalore 7+years of experience in Consultancy, Investment Banking, Ecommerce & IT Industry. Expert in IFRS, USGAAP, INDAS & US Regulatory requirement. Currently working with Deloitte Touche & Company in Risk ,Finance & Control advisory. Worked in Companies like Barclays Bank, HCL Technologies Ltd & BazaarCart.

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