Giffen good

Examples of Giffen good in the following topics:

• Deriving the Demand Curve

  • Giffen goods and neutral goods break this rule, with the former demonstrating an increase in demand as a result of a price rise (see ) and the latter demonstrating indifference to price in regards to the quantity demanded (illustrated as a completely vertical demand curve):
  • Giffen Goods - Giffen goods are a situation where the income effect supersedes the substitution effect, creating an increase in demand despite a rise in price.
  • Neutral Goods - Neutral goods, unlike Giffen goods, demonstrate complete ambivalence to price.
  • Giffen goods are essentially goods that demonstrate an increase in demand as a result of an increase in price, generally considered counter-intuitive in traditional economic models.
  • This graph illustrates the derivation of a demand curve for these goods.

• The Law of Demand

  • Though in general terms and specific to normal goods, demand will exhibit a downward slope, there are exceptions: Giffen goods and Veblen goods
  • A Giffen good describes an extreme case for an inferior good.
  • In theory, a Giffen good would display the characteristic that as price increases, demand for the product increases.
  • example of a Giffen good, though a popular albeit historically inaccurate example is the purchase of potatoes (an inferior good) as prices continued to increase during the Irish potato famine.
  • These goods are known as a Veblen goods.

• Willingness to Pay and the Demand Curve

  • In general as the price of a good increases, the quantity demanded of that good decreases.
  • Giffen goods are another example where rising prices can lead to increased demand for a product.
  • Giffen goods are very rare and are defined by three characteristics:
  • It is an inferior good, or a good for which demand decreases as consumer income rises,
  • In this instance, bread is a giffen good.

• Market Demand

  • The demand schedule represents the amount of some good that a buyer is willing and able to purchase at various prices.
  • In general, this means that the demand curve is downward-sloping, which means that as the price of a good decreases, consumers will buy more of that good.
  • A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at every different price.
  • However, special cases exist where the preference for the good or service may be perverse.
  • Two different hypothetical types of goods with upward-sloping demand curves are Giffen goods (an inferior but staple good) and Veblen goods (goods characterized as being more desirable the higher the price; luxury or status items).

• Demand Function

  • In rare cases, under extreme conditions, a "Giffen good" may result in a positively sloped demand function.
  • These Giffen goods rarely occur.
  • An individual's demand function for a good (Good X) might be written:
  • Only in unusual circumstances (a highly inferior good, a Giffen good) may a demand function have a positive relationship.
  • A superior good is a special case of the normal good.

• Defining Price Elasticity of Demand

  • The price elasticity of demand (PED) measures the change in demand for a good in response to a change in price.
  • The law of demand states that there is an inverse relationship between price and demand for a good.
  • Only goods that do not conform to the law of demand, such as Veblen and Giffen goods, have a positive PED.
  • The demand for a good is said to be elastic (or relatively elastic) when its PED is greater than one.
  • This means that demand for a good does not change in response to price .

• Elasticity of Demand

  • Only goods which do not conform to the law of demand, such as a Veblen good and a Giffen good, have a positive PED.
  • The PED of a good can also be used to predict the incidence (or "burden") of a tax on that good.
  • A number of factors can thus affect the elasticity of demand for a good:
  • Breadth of definition of a good: The broader the definition of a good (or service), the lower the elasticity.
  • Identify the key factors that determine the elasticity of demand for a good

• The Demand Curve

  • Demand is the willingness and ability of a consumer to purchase a good under the prevailing circumstances.
  • The demand curve usually slopes downwards from left to right; that is, it has a negative association (two theoretical exceptions, Veblen good and Giffen good).
  • The constant "b" is the slope of the demand curve and shows how the price of the good affects the quantity demanded.
  • Non-price determinants of demand are those things that cause demand to change even if prices remain the same—in other words, changes that might cause a consumer to buy more or less of a good even if the good's price remained unchanged.
  • However, demand is the willingness and ability of a consumer to purchase a good under the prevailing circumstances.

• Applications of Principles on Consumer Choices

  • In we are comparing 'Good X' and 'Good Y' to identify how a change in income will alter the overall amount of each good would likely be purchased along a series of indifference curves (see Boundless atom on 'Indifference Curves').
  • In the substitution effect, a lower purchasing power will generally result in a shift towards more affordable goods (substituting cheaper in place of more expensive goods) while a higher purchasing power often results in substituting more expensive goods for cheaper ones.
  • This translates to the graph above as the consumer makes choices to maximize utility when comparing the price of different goods to a given income level, substituting cheaper goods and more expensive goods dependent upon purchasing power.
  • Inversely, Giffen goods demonstrate a positive relationship, where the price rises will result in higher demand for the good and high consumption.
  • To apply this to the concept of different types of goods above, one can view wage rates and leisure time as consumer goods.

• Demand for Public Goods

  • The aggregate demand for a public good is derived differently from the aggregate demand for private goods.
  • The marginal benefit of a public good diminishes as the level of the good provided increases.
  • Public goods are non-rivalrous, so everyone can consume each unit of a public good.
  • The aggregate demand for a public good is the sum of marginal benefits to each person at each quantity of the good provided .
  • Unlike public goods, society does not have to agree on a given quantity of a private good, and any one person can consume more of the private good than another at a given price.