December 3 - Giffen Goods
A Giffen good is a paradoxical concept in economics: it is a good for which demand increases as its price rises, violating the basic law of demand. According to standard microeconomic theory, when the price of a good increases, rational consumers buy less of it (the law of demand). But with a Giffen good, the opposite happens. Though rare, Giffen goods reveal deep insights into how income and substitution effects interact in consumer behavior.
The concept is named after Sir Robert Giffen, a 19th-century Scottish economist. The idea was popularized by Alfred Marshall in his seminal Principles of Economics (1895), where he attributed to Giffen the observation that poor households in Ireland or England bought more bread or potatoes when prices rose during times of hardship. Marshall explained that these staple foods, being a large part of poor households’ consumption, could exhibit such behavior under certain conditions. Though Marshall never provided formal mathematical proof, later economists clarified the mechanisms and formalized the concept within consumer choice theory.
To understand Giffen goods, we must look at two components of how consumers react to price changes:
Substitution effect – When the price of a good rises, consumers substitute away from it toward cheaper alternatives.
Income effect – A price increase reduces real purchasing power, making the consumer effectively poorer, which can change consumption patterns.
In most cases, the substitution effect dominates, and the consumer reduces consumption of the more expensive good. But in the case of a Giffen good, the negative income effect outweighs the substitution effect, causing the consumer to buy more of the good even though it is now more expensive.
This only happens under very specific conditions:
The good must be inferior, meaning demand for it falls as income rises.
It must take up a large share of the consumer’s budget, so that a price change significantly alters their effective income.
There must be limited substitutes, so the substitution effect is small.
For decades, Giffen goods were more of a theoretical curiosity than an observed phenomenon. However, recent empirical work has revived interest. A widely cited study by Robert Jensen and Nolan Miller (2008) tested the existence of Giffen behavior in poor provinces of China. In Hunan, they found that rice acted like a Giffen good among extremely poor households. When rice prices rose modestly (due to random subsidy removals), consumption actually increased. The explanation was that rice formed such a large share of caloric intake that households cut back on more expensive side dishes and bought more rice to avoid hunger—fitting the Giffen conditions exactly.
Other suspected examples include:
Bread or cassava in parts of Africa, where they are staple foods among the poor.
Maize in parts of Latin America, though evidence is more anecdotal.
Some economists have speculated about alcohol or tobacco in certain contexts, but these often involve addiction or behavioral factors outside classical theory.
Giffen goods typically arise in situations of poverty, where staple goods dominate household budgets, households lack access to substitutes, and a price shock reduces real income sharply.
In such cases, the household reallocates spending to maximize caloric intake or utility under extreme constraint. Rather than being irrational, Giffen behavior is rational under hardship: the household sacrifices variety or quality in order to get enough of a basic good to survive. It's important to note that Giffen behavior disappears once incomes rise or substitutes become available. As such, Giffen goods are not tied to the intrinsic nature of the good, but to contextual conditions around poverty, preferences, and prices.
Giffen goods challenge the basic intuition of the law of demand, revealing how income effects can dominate substitution effects under specific, often desperate conditions. Though rare, their existence has been observed in real-world cases, particularly among the poor in developing countries. More than a theoretical oddity, Giffen goods illustrate the complex trade-offs consumers make—and underscore how economic theory must sometimes yield to the lived reality of subsistence behavior.
Sources:
Marshall, Alfred (1895). Principles of Economics, 3rd ed. London: Macmillan.
Stigler, George J. (1947). “Notes on the History of the Giffen Paradox.” Journal of Political Economy, 55(2), 152–156.
Dwyer, Gerald P., & Lindsay, Cotton M. (1984). “Robert Giffen and the Irish Potato.” American Economic Review, 74(1), 188–192.
Battalio, R.C., Kagel, J.H., & Kogut, C.A. (1991). “Experimental Confirmation of the Existence of a Giffen Good.” American Economic Review, 81(4), 961–970.
Jensen, Robert T., & Miller, Nolan H. (2008). “Giffen Behavior and Subsistence Consumption.” American Economic Review, 98(4), 1553–1577.
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Prompt: “Can you in 600 words describe what a giffen good is, and the economic theory behind them, where does the idea come from, where do we see such goods today, and how do they come about?” and “Great, thanks what are some academic sources for Giffen Goods and how/when they emerge?”