Giffen goods are named after Scottish economist Sir Robert Giffen, a Scottish Statistician and Economist. Giffen first proposed the goods and the from his observations of the purchasing habits of the Victorian era poor. The Victorian era saw widespread poverty, largely fuelled by industrialization impacting a significant portion of the population. The poor, including the working class and the underclass, lived in unclean conditions, often facing inadequate housing, sanitation, and nutrition, and many relied on charity or workhouses which were institutions in Britain and Ireland, primarily in the 17th-19th centuries, where those unable to support themselves financially were offered accommodation and employment in exchange for their labour.
Giffen goods are low-priced products of household which are necessary for our daily life, the demand for these goods rises along with the price rise. These products are necessary to fulfil the need for food, and they have only a few substitutes. Examples are bread, wheat, milk, eggs, rice etc. The thought of Giffen goods undermines the elementary law of demand. The law of demand is a fundamental principle of economics that states that at a higher price, consumers will demand a lower quantity of a good. One fact remains that consumers use economic goods to satisfy their most urgent needs first.
Giffen goods are products people consider essential to their well-being, so as prices for them go up, the demand also goes up. I give here the example of cigarettes and tobacco products which characterises the Giffen’ paradox (contradiction). Cigarette prices often rise due to increased production costs, including tobacco leaf prices, especially GST. Demand can remain relatively high despite price increases due to addiction, certain socioeconomic groups being less price-sensitive.
Giffen’s paradox refers to the unexpected situation where the demand for a good increase as its price rises, challenging the law of demand. This typically occurs with inferior goods, meaning goods that consumers buy less of when their income increases. For example, when both husband and wife earn well, they don’t depend on home cooked meal, instead they opt going out and eating. Generally, as the price of a good rises, consumers buy less of it due to reduced purchasing power and the availability of substitutes.
The poor people who cannot afford due to their negative income effect is so strong that it overcomes the positive substitution effect as switching to cheaper alternatives. This leads to consumers buying more of the good even though its price has increased. Example is medicines. It could potentially be considered Giffen goods, especially in critical situations they are essential for survival. Some medicines don’t have cheaper substitutes and are required for survival. Though their prices rise, the demand also rises because they are required for survival.
The Giffen paradox was first observed and described in the 19th century during the Irish famine. Historically Irish people did consume large portion of potatoes, making them a staple in their diet, especially in rural areas. Its cause was a fungal diesis caused to the potato crops, that led to huge losses in agriculture and the death of many people due to infection. This was the first time that a trend defying the previous laws of economics was noticed. One of the consequences of this event was a sharp increase in the price of bread, but it did not reduce spending on it. People gave up other foods to be able to afford expensive flour products.
Conclusion: Giffen’s paradox refers to the possibility that standard competitive demand, with nominal wealth held constant, can be upward sloping, violating the law of demand.
