Giffen goods
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Giffen goods are low-cost goods customers purchase more once their price increases. These products challenge the widely accepted law of demand. The examples include essential products necessary for living such as bread, wheat, and rice.
In this article, we’ll review the history and examples of Giffen goods and compare Giffen and Veblen goods.
Giffen Goods vs Veblen Goods
The terms Giffen and Veblen goods are often used interchangeably, yet they have a slight but significant difference. Let’s review each concept in more detail to find this distinctive feature.
Giffen goods are low-priced products, the demand for which rises along with the price. These products are necessary to fulfill the need for food, and they have only a few substitutes. Bread, wheat, and rice are examples of Giffen goods. The thought of Giffen goods undermines the fundamental law of demand.
Veblen goods are high-quality premium goods, the demand for which increases along with its price. This is caused by the exclusive nature of these products. Examples include sports cars, expensive accessories (diamond rings, watches, necklaces), luxury couture clothing, etc. The exclusiveness of these goods shows people’s success and demonstrates their wealth. The producers of Veblen goods focus on rich customers who can afford to buy from brands associated with luxury, exclusiveness, and wealth.
Simply put, both Giffen and Veblen goods defy the generally accepted law of demand and create a special demand curve. The curve is upward-sloping for these products. Once the price for goods increases, the demand rises as well. However, the main difference between the two is that Giffen goods focus on low-cost products whereas Veblen goods — on luxury, exclusive and premium products.
Now let’s dive into the history of Giffen goods.
History of Giffen Goods
The concept “Giffen goods” appeared for the first time in the late 1800s in regard to Sir Robert Giffen. He was an outstanding economist and statistician who highlighted the concept of Giffen goods that violate the common law of demand. One of the most influential economists, Alfred Marshall, wrote in the third edition of his Principles of Economics that despite an increase in bread’s price, people still consumed it because it was the cheapest compared to other foods.
Observations concluded that there are low-cost products that violate generally accepted rules about the demand for products. These goods are usually non-luxury and almost don’t have substitutes. The demand for bread, rice, and wheat increases when they become more expensive and decreases when these goods are cheaper.
Now that you know some essential historical facts, it’s time to explore the examples.
Examples of Giffen Goods
You can find examples of Giffen goods among the primary foods you consume every day. The main product on which Robert Giffen built his theory was bread. From then until now, bread has stayed among the essential goods necessary for our living. Since it was the cheapest product a long time ago, the demand for it rose along with its price. It was caused by poor people’s inability to buy more expensive meat and other products. Products such as rice, wheat, and potato are also Giffen goods.
Congrats, now you know the basics of Giffen goods. Hope this information helped answer your questions.
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