What is a Giffen good?

When we speak of a good Giffen, we are referring to the good whose demand increases when the price of the good increases. This behavior is exactly the opposite of what happens in normal goods, not complying with the law of demand.

La demand law indicates that the higher the price of the good, the lower its demand. In the case of Giffen goods, just the opposite happens; As the price of the good increases, the more its demand increases. It is usually associated with products that serve to be able to survive, and that must be consumed by people in order to survive in the event, for example, of extreme poverty. They are, above all, basic and staple foods

Regarding its demand curve, this type of goods has a positive slope, in which an increase in price produces an increase in the demand for good x.

Characteristics of a Giffen good

Finally, it is important that we know when we are facing a good Giffen and when not. To do this, we are going to define 3 conditions that make a good to be Giffen. They are as follows:

  • First of all, the good must be a lower good. That is, the demand for the good grows when the consumer's income is lower.
  • Second, there must be a shortage of substitute goods to the good that we are treating. To verify this, it is necessary to know that if the price of one good increases, the demand for another good also increases.
  • Finally, we must consider whether the good represents an important part of the budget available to the consumer. That is to say, we must know if the consumer must buy that good because it is essential to survive or is essential (as we have indicated above).

If these 3 conditions are met, it is most likely that we are dealing with a Giffen category good.

Leave a Comment