Giffen Goods Meaning: 3 Giffen Good Examples and a Definition

The concept of Giffen goods refers to products that experience higher levels of demand once prices go up; this is in contrast to the usual case in which demand falls as prices increase. Economists depict Giffen goods with a downward-sloping demand curve in econometric charts instead of the upward-sloping demand curve common to most other types of goods.

It’s easy to confuse Giffen goods with Veblen goods, considering they have a similarly backward effect on typical demand curves. Giffen goods are basic, low-cost, and often essential goods, whereas Veblen goods are mostly luxury, status-symbol items—like perfumes and certain cars—that see their demand climb as their prices rise.

The term “Giffen goods” derives its name from Scottish economist Sir Robert Giffen. As he surveyed the plight of low-income British citizens in the Victorian era, he noticed some essential goods saw increased demand while prices for them went up.

In honor of Giffen’s discovery, another British economist of the period, Alfred Marshall, named these types of goods after Giffen in his book Principles of Economics.

At its most basic, a Giffen good is a product for which the demand rises as the price climbs; however, economists insist on Giffen goods meeting certain criteria for legitimacy:

• Spending on the good must be significant. Giffen goods must account for a substantial amount of income a specific group of consumers spends. This makes certain products Giffen goods for low-income consumers but not for moderate to high-income consumers since high-earners feel less impact from price level increases and decreases.
• The good must be inferior to other products. Giffen goods are typically inferior goods when you compare them to other products. This is one of the main reasons a rise in the price of a Giffen good causes a surge in demand. If it has become more expensive, it’s usually a sign normal goods have become even more cost-prohibitive to low-income consumers. People buy more of the inferior products to make up for the fact they can no longer afford better ones.
• The good must defy typical demand curve logic. The Giffen paradox states some goods can defy typical rules of microeconomics, namely that demand can go up at the same time a price increases for a very specific type of good. All Giffen goods must create a downward rather than upward-sloping demand curve on an econometric chart as a result.
• There must be a lack of substitute goods. A lack of close substitutes available triggers Giffen behavior in consumers. This substitution effect leads to demand increases for Giffen goods simply because consumers have no other options to purchase—either because they’re too expensive or are simply not available.

Giffen goods are products people consider essential to their well-being, so as prices for them go up, so, too, does demand. Consider these three examples that typify the Giffen goods phenomenon:

1. 1. Cigarettes: Tobacco products show the Giffen paradox at work. Addicted smokers will more likely pay for cheaper cigarettes when they become more expensive than to do so for brands that start off more moderately priced. The price elasticity of demand over time brings in plenty of consumers regardless, given that many smokers feel a psychological and physical need for cigarettes.
2. 2. Potatoes: As one example of a Giffen good, think of the surging price and demand for this root vegetable during the Irish potato famine in the mid-1800s. Given the fact there were few substitutes available at the time, the inflated price of potatoes didn’t prevent Irish citizens from demanding more of the food to feed themselves and their families. People would buy up as much as possible because they were unsure if greater shortages were on the horizon.
3. 3. Rice: In 2007, researchers gave citizens of Hunan, China, a subsidy to help pay for food in the region. Rice is a dietary staple for the people of Hunan and was more expensive than it had been in recent years. The authorities found Hunan residents were more likely to pay the higher price of rice when they no longer received the subsidy rather than when they did. A similar study in Gansu attempted to prove the same thing about wheat, a staple food of the region, but they could not reproduce the same results.

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