Giffen Good

Updated Jan 18, 2020

Definition of Giffen Good

A Giffen good is a good for which an increase in the price raises the quantity demanded. That means people want to buy more of it when it becomes more expensive and less of it when it becomes cheaper. Giffen Goods were first described in the late 1800s and are named after Scottish economist, Sir Robert Giffen.

Example

One of the most famous examples of a Giffen good is bread. Imagine a small village where people can only buy two types of food; bread and meat. The cost of bread is USD 1.00, per lb., whereas meat costs USD 5.00, per lb. Now consider a poor family that can only afford to spend USD 200.00 on nutrition. To survive, they need to eat at least 120 lb. of food (i.e., minimum consumption) each month. Thus, we can illustrate their consumption as follows:

Now, imagine the price of Bread increases to USD 1.50. In this scenario, the family would have to pay USD 250.00  to maintain the same level of consumption (i.e., USD 150.00 on bread and USD 100.00 on meat). Unfortunately, however, they cannot afford that (see also budget constraints). Therefore, they have to adjust their consumption to stay within their budget and still get at least 120 lb of food. Hence, the table below shows their new consumption.

As you can see, despite the increase in price, the quantity demanded of bread has actually gone up (116 compared to 100). The reason for this is that there is no cheap substitute for bread. Therefore, the family cannot switch to another product, and the bread takes up more of their limited budget. As a result, they have less money to buy more expensive meat. Instead, they even have to swap some meat for additional bread to meet their minimum consumption (because bread is still cheaper than meat). In other words, because the family has to pay more for bread, they cannot afford to buy as much meat anymore, so they buy even more bread instead.

Why Giffen Goods Matter

Giffen goods defy the fundamental economic law of demand, which states that quantity demanded falls as price rises. However, even though they oppose standard economic conventions, Giffen goods can be explained by means of income and substitution. They focus exclusively on low income and non-luxury products that have no close substitutes. In these situations, people have no other choice but to increase their consumption as the price increases. Thus, Giffen goods can be considered an exception to the rule.