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« This Would Make Hayek Smile | Main | Perfect Substitutes? »

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Econodude

Nowhere in the definition of Giffen good does it explicitly state that the good must be inferior, at least not in the definition that I was taught. All that is required for a good to be a Giffen good is that its demand curve is essentially not independent of its supply curve. More specifically, in the case of the Irish potatoe famine, the change in demand roughly negatively related to the change in supply. No implications or explicit statements about the quality of the good are present.

Phil Miller

The idea that a Giffen good must be inferior comes from the substitution and income effects of a price change.

Substitution effect: when the price of good X goes up, other goods become relatively less expensive. Consumers buy less of the relatively more expensive good (X) and more of the relatively less expensive goods in an attempt to stay as well-off as before.

Income effect: when the price of a good goes up, this acts like a decrease in income because a consumer's purchasing power goes down.

How consumers react to the change in price with regards to the income effect depends on whether consumers consider the good normal or inferior. If the good is normal, people buy less of the good. In this case, the income effect works in the same direction as the substitution effect. If the good is inferior, people buy more of the good, thereby offsetting the substitution effect, at least somewhat. With a Giffen good, we must have an inferior good where the income effect more than offsets the substitution effect.

In all my years of studying economics, I have never heard that interpretation of Giffen's paradox. I'm not discrediting it, but I still prefer the interpretation whereby the consumer's consumption function has been artificially skewed. In terms of income and substitution, they have warped into a realm where substitution is impossible.

Oh well, different interpretations for the same event.

Phil Miller

Interesting. I don't recall where I learned it (either intermediate micro or graduate level micro). I could be completely wrong in my interpretation, but that's my story and I'm sticking to it ;-)

asdf

I have studied economics at Bachelors level. The whole problem with Definitions of Giffin goods come from Giffen's original theory, preposed by 'Econodude'. there has been evidecnce to suggest Giffens theory was fabricated and he never even went to Ireland. therefore the idea Econodude propses is based on the Irish pot. famine. B

But the principle is still true. But it applies to goods where price infers quality. such as Fresh Fruit, or designer labels, clothes watches etc. and also when there is a 'snob' value attached to goods thus it is a status symbol to have something so expensive. like tulips is Holland pre 1700s.
Any thoughts?

Anthony White

By accident I think I created a Giffen Good with my artwork. It might make for an interesting study because I have the prices and dates of when all my artwork was sold on my web site.

My sales do not seem to slow down as the price increases.

Regards

Anthony White
www.anthonywhite.net

Retro

You're actually talking more of a Veblen good than a Giffin good.
http://en.wikipedia.org/wiki/Veblen_good
http://en.wikipedia.org/wiki/Giffen_good

Part of the perceived vale is in the price and exclusivity. When the price drops the customer no longer gets the "prestige" or exclusivity value they seek.

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