Giffen Good
Categories: Econ
Giffen goods are the unicorns of the supply-and-demand world. When the price of a Giffen good goes up, its demand also goes up. And that’s weird. Because, as we all know, when a good’s price increases, its demand is supposed to decrease.
So what could possibly cause this? Well, in the very few actual cases that might have existed (we’ll explain the “might” in a bit), the Giffen good was a cheap necessity (like rice or bread) with expensive substitutions (like meat). The thinking is this: if we’re living on a low or fixed income, we can’t spend a lot on the expensive substitution item. So if the price of the Giffen good goes up, we’ll end up buying more of it, because now we can afford that substitution item even less.
Let’s put some numbers to this. Let’s say we’ve got $20 to spend on food for the week. A pound of grits costs $10 and a pound of pork costs $10, so guess what we’re going to do? That’s right: we’re going to buy a pound of grits and a pound of pork. But now let’s say the price of grits increases to $15 per pound. What are we going to do? We can’t just ix-nay the grits and spend $20 on pork; that’ll only feed our family for two days, while a pound of grits lasts the whole week. We have no choice—we have to pay the higher amount for the grits. And since we now can’t afford both the grits and the pork, we’ll probably end up just buying $20 worth of grits to make up some of the calories we’d normally get from the pork.
Voila, grits have become a Giffen good. The price went up…and so did the demand.
Now back to that word “might” we used earlier. Giffen goods are also like unicorns, because some economists doubt they even exist. They say that the few examples researchers have come up with could also be explained by other factors, like advances in nutritional science or the fact that people usually have more than two goods to choose from. But even if Giffen goods aren’t real, even if they’re a completely made-up theoretical construct used to explain scenarios that may or may not actually happen in real life...we’re still holding out hope for unicorns.