Giffen Goods: When Demand Rises With Price

The rare case where people buy more of a good when its price rises, and the modern evidence that such goods really exist among very poor households.

The law of demand says people buy less of a good when its price rises. But economists have long discussed a strange exception: the Giffen good, whose demand rises when its price rises.

How it could happen

A Giffen good is an extreme kind of inferior good. Consider a very poor family that spends most of its income on a cheap staple food, like rice, and a little on a more expensive food, like meat, which it prefers.

If the price of rice rises:

The substitution effect pushes the family to buy less rice.
The income effect is large, because rice takes up so much of the budget. The family becomes significantly poorer. It can no longer afford as much meat, so to get enough calories, it buys even more rice.

If the income effect outweighs the substitution effect, the family buys more rice at the higher price.

The history

The idea is named after Sir Robert Giffen, a 19th-century statistician, and was discussed by Alfred Marshall in relation to bread consumption among the poor. For a long time, economists debated whether Giffen goods truly existed, as convincing evidence was scarce.

Modern evidence

In a 2008 study, economists Robert Jensen and Nolan Miller ran an experiment in China. They gave poor households in Hunan province vouchers that lowered the price of rice, and in Gansu province vouchers lowering the price of wheat flour, the staple there. They found that the poorest households in Hunan bought less rice when it became cheaper, and more when it was relatively more expensive, consistent with rice being a Giffen good for them. With the savings from cheaper rice, they bought more meat and other preferred foods.

Why it matters

Giffen behaviour appears only in special conditions: very poor households, a staple that takes up a large share of spending, and few substitutes. It reminds economists that the law of demand is a strong tendency, not an absolute rule, and that food price changes can affect the poorest in surprising ways.

The rice family

A very poor family eats mostly rice with a little meat. When rice prices rise, the family cannot afford both its usual rice and meat. It drops meat and buys more rice to avoid going hungry. Spending on rice rises, and so does the quantity bought, even though rice is now more expensive.

Thinking Giffen goods are common

Giffen goods are rare, appearing only among very poor households for staples that dominate their budgets. For most goods and people, the law of demand holds.

Key takeaways

A Giffen good is one whose demand rises when its price rises.
It arises when a strong income effect outweighs the substitution effect.
Jensen and Miller found evidence that rice was a Giffen good for very poor households in Hunan, China.
Giffen goods are rare and occur only in special conditions of poverty.