Giffen good

A Giffen good is a product or commodity that has an increase in demand when its price increases. This violates the general law of supply and demand and is very unusual or even non-existent. An equivalent way of defining a Giffen good is to say the rise in its price causes an increase in its demand. One possible example may be with art paintings.

For a Giffen good to exist, theoretically three extraordinary economic characteristics must exist at the same time:

* The good must be an inferior good, such that the demand for the good decreases with an increase in consumer income
* The good must have an extraordinary income effect, such that a decline in price of the good causes a significance rise in real income or wealth by consumers due to the savings
* There must be no substitutes available for the good.

The most commonly cited example of a Giffen good was the potato in Ireland in the 1800s, when families lived almost entirely on potatoes for their sustenance. If a family ate meat once a week, and the price of potatoes rose, the family might not have been able to afford meat, and instead was forced to eat potatoes 7 days a week, causing an increase in the demand for potatoes.

Some economists today feel that a Giffen good never existed and cannot exist. An economics paper by John H. Nachbar explained:[1]

Giffen goods have long been a minor embarrassment to courses in microeconomic theory. The standard approach has been to dismiss Giffen goods as a theoretical curiosity without empirical content. This note points out that the underlying theory is itself seriously flawed.

The concept of a Giffen good is contrary to the ability of the invisible hand to create substitutes. Instead, the Giffen good relies on a single good have enormous power over the consumers, essentially holding them hostage in an economic sense.

The history of the name "Giffen good" is as suspect as its existence. Alfred Marshall wrote in his Principles of Economics (3rd Ed. 1895):

As Mr. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.

But no one has ever found where Sir Robert Giffen (1837–1910) made such an argument.

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Sources:

1. ↑ http://econpapers.repec.org/paper/wpawuwpge/9602001.htm