Ordinary Goods vs Giffen Goods

Ordinary Goods vs. Giffen Goods

The law of demand is one of the most fundamental economic concepts. It states that the quantity demanded of a good decreases as its price increases (and vice versa). While this holds true for most goods and services, there are some exceptions to the rule. Therefore, we can distinguish at least two types of goods, depending on their relationship between price and quantity demanded: ordinary goods and Giffen goods (named after Sir Robert Giffen). We will look at both of them in more detail below.

Ordinary Goods

Ordinary goods are goods that experience an increase in quantity demanded when price falls or conversely a decrease in quantity demanded when price rises. This results in a downward sloping demand curve, which is in line with the law of demand. As a rule of thumb, virtually all goods are ordinary goods. There is only a very limited number of goods where the law of demand does not apply.

Although they share some similarities, ordinary goods should not be confused with normal goods. Normal goods are characterized by their relationship between income and quantity demanded. Meanwhile, ordinary goods are classified according to their relationship between price and quantity demanded.

For example, if the price of ice cream increases from USD 2.00 to USD 3.00, some people will stop buying it, because they think it is to expensive. As a result, quantity demanded falls. However, if the price falls to USD 1.00, some of the people could not afford (or want to) buy ice cream before will enter the market, which results in an increase in quantity demanded.

Giffen Goods

Giffen goods are goods that experience an increase in quantity demanded when price rises or conversely a decrease in quantity demanded when price falls. That results in an upward sloping demand curve (see also how to calculate a linear demand function), which contradicts the law of demand. Giffen goods are usually staple goods that don’t have any close substitutes. An increase in the price of these goods often means consumers are left with less money to buy more expensive products, so they are forced to buy more of the staple goods (despite the higher price).

Although similar at a first glance, Giffen goods should not be confused with Veblen goods. Veblen goods also experience increased demand as their price rises. However, they are luxury products (used mainly as status symbols) and not staple goods. Thus, in the case of Veblen goods the increase in quantity demanded is fueled by the price itself, because they are mainly bought for conspicuous consumption (and not out of necessity).

To give an example, let’s look at the demand for rice in an imaginary rural province in Asia. Most people in this area are farmers with a low income. A large part of their diet consists of rice, because it is cheap and they cannot afford to buy expensive food. With the money they have left, they supplement their diet with more expensive food such as meat or other animal products. Now when the price of rice increases, the poor farmers have less money left to buy more expensive food, so they may actually be forced to buy more rice instead.

In a Nutshell

The law of demand states that the quantity demanded of a good decreases as its price increases (and vice versa). While this holds true for most goods and services (i.e. ordinary goods), there are some exceptions to the rule (i.e. giffen goods). Ordinary goods are goods that experience an increase in quantity demanded when price falls or conversely a decrease in quantity demanded when price rises. Meanwhile, Giffen goods are goods that experience an increase in quantity demanded when price rises or conversely a decrease in quantity demanded when price falls.

Leave a Reply

Your email address will not be published. Required fields are marked *

I agree that my data may be stored and used as stated in the privacy policy.