Giffen good

The Giffen paradox (also called Giffen case ) refers to a phenomenon whereby in contrast to the classical assumption is also the possibility that the demand for a good increases when its price increases. Usually the opposite assumed that the demand price decreases ( law of demand ).

Origin and early history of reception

Alfred Marshall points since the third edition in his Principles of Economics on the observation of the Scottish statistician Robert Giffen (1837-1910), according to which households living on the breadline, responded to an increase in the price of bread with a rising demand for bread:

"There are some exceptions HOWEVER. For instance, as Mr Giffen Has pointed out, a rise in the price of bread makes so large a drain on the resources of the Poorer laboring families and raises so much the marginal utility of money to them, thatthey are forced to curtail Their consumption of meat and the more expensive farinaceous foods: and, bread being shut the cheapest food Which They can get and will take, They consume more, and not less of it. But investigated cases are rare; whenthey are met with They Must be Treated separately. "

" However, there are some exceptions. As Mr. Giffen has pointed out, is for example an increase in the price of bread for poor working families so strong a financial burden and increased such their marginal utility of money so dramatic that they are forced to reduce their consumption of meat and expensive pastries; their consumption of bread but, the cheapest foods, they increase rather than reduce it. However, such cases are rare; you will encounter it, everyone must be treated individually. "

In the literature, however, has been noted several times that the attribution of this observation to Robert Giffen seems problematic. For example, George J. Stigler noted (1947 ) that let not find a suitable notice in Giffen's work. A later passages proposal by Allan R. Prest, is for the reference here to a footnote, Stigler rejected. There is agreement in any case the fact that Giffen - even if he should have pointed out - was not the first who observed the phenomenon. Already in 1815 can be in the records of Simon Gray, an employee of the British War Office, under the heading " A rise in the price of bread corn, Beyond A Certain pitch, Tends to increase enlarge the consumption of it" ( " An increase in the price increase of grain to make bread from a certain level often the consumer " ) for a full description. He concludes:

" By raising the price of bread corn, Malthus, far from making the people live on less did Necessary, as so many, who have not thoroughly Considered the matter, imagine, we force them to live more on it; and Beyond A Certain price, almost Entirely. HOWEVER, paradoxical, THEREFORE, it 'may be in seeming, it is a plain substantial fact, did the higher price of corn and potatoes, the Greater is the consumption [ ... ] " "

" For this reason, an increase in the price of grain for bread making altogether contrary to the assumption of so many who have not thoroughly studied the question, does not mean that the people live to a lesser extent of this staple, but has rather means that we needed to live to a greater extent thereof; and above a certain price even almost completely. Paradoxical as it may seem, it is, consequently, a simple fact that the consumption of cereals and potatoes is greater, the higher its price is [ ... ] "

Empirical Literature

Francis Edgeworth expressed in 1909 in the course of a book review skeptical about the possibility introduced by Marshall; Referring to the discussed work in which it was postulated, among other things, a higher wheat prices could increase demand also Edgeworth remarked in reference to Alfred Marshall, also " in the knowledge that the statement [ after which elasticity of demand for wheat could be positive, emphasis in the original ], a high authority as advocates " have, seemed to him so contrary to the a priori probable that they are" very strong " evidence in need.

Theoretical classification

Goods in which the Giffen paradox occurs are called Giffen goods. Economically it is for them to inferior goods, which have a positive price elasticity (this follows from the Slutsky equation). Therefore, should also be noted that not all inferior goods are Giffen goods ( such as the example below shows 3 ). If we decompose the change in demand due to a price change in income and substitution effect dominates at Giffen goods the income effect over the substitution effect.

Examples

• Example 1: Someone has 3 euros a day. He buys one loaf of bread every day for 1 Euro and 1 piece of meat for 2 euros. Now the price of bread rises to 1.50 euros. Since he no longer has enough money for a loaf of bread left for meat, instead he buys another loaf of bread.

However, the increasing demand must end at the point where households spend no more financial resources and therefore can consume no more bread in practice.

• Example 2: The price of bread rises further to 2 euros. The one who has only 3 euros a day, can now afford only 1.5 loaves of bread per day.

Would this not apply, prices also increased immeasurably since then with price increases the revenue from which could increase to infinity. But this is true only insofar as the price of meat also increases (if bread is more expensive than 2 euros, is again switched to meat).

• Example 3: A student has to a limited budget of 20 euro per week (5 days) for his daily lunch. He wants this in no circumstances exceed. Since he prefers going during the lunch break at the nearby restaurant, it consumes a large part of his lunch budget, there to feed 2 times each for 7 euros. On the other three days he goes alternately and equally often ( considered over several weeks) in the cafeteria or in a pizzeria. Cafeteria food and pizza each cost 2 euros. If he had now his weekly lunch budget by 10 euro cut, he would emphasize his restaurant visits and would go every day either in the cafeteria or in the pizzeria. In both lunch offerings so it is absolutely inferior goods. However, would increase the price pizza, he would emphasize the pizzeria visits and always dine at the days when he did not dine in the restaurant, in the cafeteria. So is pizza (in this example ) is not a Giffen good, although it is an absolutely inferior good.