Giffen Good
Candlefocus EditorThe Giffen Paradox, as it is often referred to, is well documented since it was first observed by the Scottish economist Robert Giffen in the late 19th century. Essentially, Giffen goods are non-luxury, low-income items which consumers cannot afford to live without and therefore must continue to purchase despite higher prices. The lack of close substitutes and continuing income pressures are the main reasons the demand of these goods increases.
Food items such as wheat, barley, potatoes, and rice are typically considered the classic examples of Giffen goods. The demand of these goods is highly inelastic and consumers purchase them regardless of price. It is a result of a low-income bounded rationality which drives individuals to purchase more of a certain good even when it becomes increasingly expensive.
Whereas most consumer goods follow a classic downward-sloping demand curve when the price rises, Giffen goods move in the opposite direction. Many economists today agree that this paradox is an illustration of how human behaviors and psychological biases can lead to irrational economic decisions.
In some ways, Giffen goods are similar to Veblen goods, which are high-end luxury items usually desired by people from upper-classes. The main difference between the two is that Veblen goods' demand is driven by social status and higher prices. In other words, more expensive Veblen goods are perceived to be of better quality, making them more attractive to high-end consumers.
In conclusion, Giffen goods demonstrate the unusual paradox where demand increases when prices rise. These types of goods are low-budget items which consumers cannot live without and therefore must purchase regardless of price increases. They are a rare case of economic goods which defy traditional economic laws. Understanding Giffen goods can shed some light on the complexities behind human purchasing decisions and how they sometimes seem to defy logic.