What are Giffen goods
What are Giffen goods?
What exactly are Giffen goods and are they pure theoretical interest or has there been empirical evidence of their existence?
Consider the Slutsky equation,
A Giffen good is the case where the income effect is negative and large enough (in size) that .∂x∂x∂ichx∂x∂p> 0
There are three necessary prerequisites for this situation to occur: (1) the commodity in question must be an inferior commodity, (2) there must be a shortage of close substitutes, and (3) the commodity must constitute a significant percentage of the income of the buyer's income, but not such a high percentage of the buyer's income that none of the normal commodities associated with it is consumed.
(Sufficient if (1) also adds that the good is so inferior that the income effect is greater than the substitution effect.)
A Giffen good does not generate its benefits directly through its price. Contrast this with a Veblen good where the user actually benefits directly derived from the price.
This link provides some information on empirical evidence.
It is rather unlikely that the demand for a commodity will take hold of the property Having market level , whereby the averaging over heterogeneous preferences, different income levels and the resulting differentiated behavior usually compensates for Giffen phenomena.
Looking at @jmbejara's answer, goods that are likely to meet all three of the necessary conditions are drugs like heroin. Heroin is fine because, while it can have negative side effects and eventually serious effects, it provides immediate positive benefits when used. Here we observe that:
1) Inferior good (= negative income elasticity). This is what data shows: The majority of heroin use is by lower-income people (the in front income-damaging effects that the habit itself may have of being "low-income").
2) Lack of close substitutes : Heroin becomes a biological one desire because it replaces the production of opiates that the human body normally produces itself in order to actually regulate its sensitivity to stimuli pain . The fact that heroin can also induce a "get-high" state has to do with the fact that the amount of opiates that is introduced into the body by heroin injection exceeds the level produced by the body itself. This is a very specific service and substances like methadone don't get close enough. More importantly, they are not freely available either, so the substitution effect, while it may exist, may not actually materialize.
3) Significant percentage of income: Heroin has relatively high prices due to its illegal status (and the associated risk), but also because the supplier takes advantage of the necessity and urgency with which the goods are requested. In combination with a relatively low income, the condition should be met.
So there is a visible likelihood that rising heroin prices will lead to an increase in demand, at least for a subset of people.
The usual textbook example of a Giffen good (ie a good with an upward demand curve) is the Irish famine. The idea is that as potatoes (a staple food) got more expensive, people couldn't afford expensive foods like meat and so they bought more potatoes! However, this example has been criticized, not least because of the famine the total potato consumption must have decreased by this point in time. You can read a critique of the potato hunger hypothesis here.
Recent work has suggested, however, that the consumption of rice (also a staple) in some poor parts of China does Giffen show behavior. This study was published in 2008 by Jensen and Miller in the AER entitled "Giffen Behavior and Subsistence Consumption". They conducted a field trial subsidizing rice consumption (ie, lowering its apparent price) for randomly selected households and found that the result was a decline in rice consumption.
Alfred Marshall popularized the notion of a Giffen Manor in 1895, but it wasn't until the 21st century before fairly robust evidence of Giffen Bahviour emerged. That it took so long to find such an example suggests that Giffen merchandise is indeed a very rare phenomenon.
(Correct me if I am wrong, but) a Giffen good is exactly a good whose demand increases with increasing price and with decreasing price ceteris paribus sinks . In other words, their consumption decreases as they become cheaper.
Do they exist? It is obvious to me that there are examples of this in the real world. Just look around, for many the price is also a signal of quality (definitely culture-dependent), and usually a higher price can trigger a higher demand (in my personal experience). However, I have heard many established economists question its existence. Here's what a reference book has to say about it. (Mas-Colell et al., 1995, p. 26).
Also, check out a paper that "provides the first real evidence of Giffen's behavior, that is, increasing demand". : http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2964162/
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