what exactly is a giffen good

[YellowSpider]

i was just going through the definitions of veblen and giffen goods. i understand that a veblen good is related to preference, status and the good's 'snob value' but what exactly is a giffen good? please explain with examples and what's the difference between the two?

thanks

Edited November 7, 2013 by MISHI

[yuu]

Giffen goods are a specific type of inferior good with few close substitutes and the expenditure on the good takes up a large proportion of consumers’ income, i.e basic staple food which takes up a significant proportion of the poor's income. So when there's increase in price, the poor will face a fall in real income and they'll purchase more of inferior goods like rice. So the demand curve of a Giffen good is upward sloping.

[YellowSpider]

Giffen goods are a specific type of inferior good with few close substitutes and the expenditure on the good takes up a large proportion of consumers’ income, i.e basic staple food which takes up a significant proportion of the poor's income. So when there's increase in price, the poor will face a fall in real income and they'll purchase more of inferior goods like rice. So the demand curve of a Giffen good is upward sloping.

yeah i remember reading about the income effect, but i still don't get why they would purchase MORE of that good.. that's what is confusing me. i mean, okay let's assume there's a decline in their real incomes, why would they purchase more of rice?! i know it would take a greater proportion of their income, but they wouldn't purchase MORE, would they?

[r1111]

"As Mr. Giffen suggested more than 100 years ago, goods whose price and demand move in the same direction are most likely to be essential products such as food on which households spend a large part of their incomes. Wheat flour and rice fit the bill in central China. When the price of the good falls, the household in effect has become richer, with more income to spend. But rather than buy more rice at the cheaper price, the household might instead choose to spend its extra income on more expensive and previously unattainable items like meat. The classic example of a Giffen good is a potato during the Irish potato famine. The Harvard economists say that that the example is probably apocryphal. There is certainly no data to support it. But when they subsidized the prices of rice and wheat flour for five months in China, they found that the subsidy led to reduced consumption of rice or wheat, and its removal to more consumption. Mr. Rodrik says that while this is an exciting find, its scope is limited: Environmentalists, he says, shouldn’t aim to depress consumption of fossil fuels by reducing the price of oil. — Robin Moroney"

http://blogs.wsj.com/informedreader/2007/07/16/economists-hunt-for-a-giffen-good-might-have-ended/

So basically when they subsidized the rice, the people brought a little less rice at a much lower cost than before and they had money left over to buy meat or vegeatbles. As you probably know eating rice alone tastes bad. People think the irish potato may have been an example of a giffen good also. Hope that helps!

[YellowSpider]

"As Mr. Giffen suggested more than 100 years ago, goods whose price and demand move in the same direction are most likely to be essential products such as food on which households spend a large part of their incomes. Wheat flour and rice fit the bill in central China. When the price of the good falls, the household in effect has become richer, with more income to spend. But rather than buy more rice at the cheaper price, the household might instead choose to spend its extra income on more expensive and previously unattainable items like meat. The classic example of a Giffen good is a potato during the Irish potato famine. The Harvard economists say that that the example is probably apocryphal. There is certainly no data to support it. But when they subsidized the prices of rice and wheat flour for five months in China, they found that the subsidy led to reduced consumption of rice or wheat, and its removal to more consumption. Mr. Rodrik says that while this is an exciting find, its scope is limited: Environmentalists, he says, shouldn’t aim to depress consumption of fossil fuels by reducing the price of oil. — Robin Moroney"

http://blogs.wsj.com/informedreader/2007/07/16/economists-hunt-for-a-giffen-good-might-have-ended/

So basically when they subsidized the rice, the people brought a little less rice at a much lower cost than before and they had money left over to buy meat or vegeatbles. As you probably know eating rice alone tastes bad. People think the irish potato may have been an example of a giffen good also. Hope that helps!

yeah it helped, thanks