Giffen goods: the market economy paradox

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

The market economy has its own laws, according to which this science is built. For example, everyone knows the law of supply and demand. There is another law - on the ratio of the cost of goods and its quantity,

which is in demand. In other words, the higher the price of a product, the fewer people will want to buy it. But there is always an exception to the rule. It is also present in a market economy. These are the so-called Giffen goods.

Two economic effects

Before we deal with Giffen goods, let's remember the two main effects on which the laws of economics are based. These are the income effect and the substitution effect.

The income effect shows the relationship between the real profit of the consumer and his demand when prices change. That is, if a product becomes cheaper, you can buy a much larger amount of this product for the amount that you usually spent on its purchase. Or, leaving the demand for it unchanged, spend your money on other goods. So lowering the price will make you richer.

The substitution effect shows how the price of a good is related to its demand. Thus, the reduction in the price of one type of goods makes it much more attractive in terms ofcompared to other types. That is, the demand for this product increases, and more expensive varieties of products begin to replace them.

Giffen Goods

The relationship where demand goes up when prices go down is common to most products in our market.

Their experts call normal. But there are other goods - Giffen goods. What is characteristic of them? Why are they singled out in a separate group?

The fact is that they do not obey the basic law of the economy. When the price increases, the demand also increases. This category of goods got its name in honor of the famous economist Richard Giffen. It was he who first noticed and tried to explain this exception to the rule. Therefore, today there is such a thing as the Giffen paradox.

The meaning of it is that with an increase in price, there is an increase in demand for goods. A decrease in cost reduces demand. What is the secret here?

Giffen goods are goods (most often called inferior) that make up the bulk of a family's consumption. That is, if people mostly eat potatoes, and very few funds are allocated for meat or fish,

then with an increase in the cost of potatoes, they will refuse meat and fish in order to buy potatoes in the usual volume.

On the other hand, if the price of potatoes goes down, the demand for them will also fall, because the freed money can be spent on other goods.

Examples of Giffen goods

Among some experts, there is an opinion that such a paradox is typical only for underdeveloped countries, in which the population is so poor that it is forced to be content with the consumption of only one product. However, this is not quite true. Giffen products are available in every country. Their distinguishing features:

1. They are of little value.
2. Take a huge place in the budget of the consumer.
3. Do not have an identical substitute.

For example, for our country Giffen goods are tobacco, s alt, matches, tea. For China, rice and pasta.

Veblen Goods

Besides Giffen goods, which are of low value, there is another category - Veblen goods. They behave in the same way as Giffen goods, although they are considered quite prestigious. The American sociologist Thorstein Veblen noticed this phenomenon. He called this pattern the conspicuous consumption effect.

The category of such goods includes those that are purchased in order to impress others. This includes perfume or jewelry, that is, all those goods that are luxury and emphasize the status of the owner.

When perfume prices drop, it is unlikely that anyone will buy them, as the buyer is afraid of fakes. In this regard, two types of prices can be distinguished:

• Real, that is, the one that the buyer really paid for.
• Prestigious, that is, the one he paid according to other people.

For such goods, the higher the price, thehigher demand, although for a very different reason than for Giffen goods.

As you can see, our economy is by no means unambiguous, it contains many exceptions that have long passed into the category of regularities. Goods of Giffen and Veblen are eloquent confirmation of this.