What is GIFFEN GOOD?

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What does GIFFEN GOOD mean? GIFFEN GOOD meaning - GIFFEN GOOD definition - GIFFEN GOOD explanation. What is the meaning of GIFFEN GOOD? What is the definition of GIFFEN GOOD? What does GIFFEN GOOD stand for? What is GIFFEN GOOD meaning? What is GIFFEN GOOD definition?

In economics and consumer theory, a Giffen good is a product that people consume more of as the price rises and vice versa—violating the law of demand. For any good, as the price of the good rises, the substitution effect makes consumers purchase less of it, and more of substitute goods; for most goods, the income effect (due to the effective decline in available income due to more being spent on existing units of this good) reinforces this decline in demand for the good. But a Giffen good is so strongly an inferior good (being more in demand at lower income) that this contrary income effect more than offsets the substitution effect, and the net effect of the good's price rise is to increase demand for it.

Evidence for the existence of Giffen goods is limited, but microeconomic mathematical models explain how such a thing could exist. Giffen goods are named after Scottish economist Sir Robert Giffen, to whom Alfred Marshall attributed this idea in his book Principles of Economics. Giffen first proposed the paradox from his observations of the purchasing habits of the Victorian era poor.

It has been suggested by Etsusuke Masuda and Peter Newman that Simon Gray described "Gray goods" in his 1815 text entitled The Happiness of States: Or An Inquiry Concerning Population, The Modes of Subsisting and Employing It, and the Effects of All on Human Happiness. The chapter entitled A Rise in the Price of Bread Corn, beyond a certain Pitch, tends to increase the Consumption of it, contains a detailed account of what have come to be called Giffen goods, and which might better be called Gray goods.

Evidence for the existence of Giffen goods has generally been limited. A 2008 paper by Robert Jensen and Nolan Miller made the claim that rice and wheat/noodles are Giffen goods in parts of China by tracking prices of goods. Another 2008 paper by the same authors experimentally demonstrated the existence of Giffen goods among humans at the household level by directly subsidizing purchases of rice and wheat flour for extremely poor families. It is easier to find Giffen effects where the number of goods available is limited, as in an experimental economy: DeGrandpre et al. (1993) provide such an experimental demonstration. In 1991, Battalio, Kagel, and Kogut proved that quinine water is a Giffen good for some lab rats. However, they were only able to show the existence of a Giffen good at an individual level and not the market level.

All Giffen goods are inferior goods, but not all inferior goods are Giffen goods.
Giffen goods are difficult to find because the definition requires a number of observable conditions. One reason for the difficulty in finding Giffen goods that is Giffen originally envisioned a specific situation faced by individuals in poverty. Modern consumer behaviour research methods often deal in aggregates that average out income levels, and are too blunt an instrument to capture these specific situations. Complicating the matter are the requirements for limited availability of substitutes, as well as that the consumers are not so poor that they can only afford the inferior good. For this reason, many text books use the term Giffen paradox rather than Giffen good.

Some types of premium goods (such as expensive French wines, or celebrity-endorsed perfumes) are sometimes called Giffen goods—via the claim that lowering the price of these high status goods decreases demand because they are no longer perceived as exclusive or high status products. However, the perceived nature of such high status goods changes significantly with a substantial price drop. This disqualifies them from being considered Giffen goods, because the Giffen goods analysis assumes that only the consumer's income or the relative price level changes, not the nature of the good itself. If a price change modifies consumers' perception of the good, they should be analysed as Veblen goods. Some economists question the empirical validity of the distinction between Giffen and Veblen goods, arguing that whenever there is a substantial change in the price of a good its perceived nature also changes, since price is a large part of what constitutes a product. However the theoretical distinction between the two types of analysis remains clear. Which one should apply to any actual case is an empirical matter.