Giffen paradox is a phenomenon in economics and consumer theory where the demand for a product increases as the price of the product rises, and vice versa, violating the basic law of demand in microeconomics. This paradox occurs when a product is so strongly an inferior good in the minds of consumers that the contrary income effect more than offsets the substitution effect, and the net effect of the goods price rise is to increase demand for it. Giffen goods are named after Scottish economist Sir Robert Giffen, who first proposed the paradox from his observations of the purchasing habits of the Victorian era poor.
Key points about Giffen paradox include:
- A Giffen good is a product that people consume more of as the price rises and vice versa, violating the basic law of demand in microeconomics.
- A Giffen good is so strongly an inferior good in the minds of consumers that the contrary income effect more than offsets the substitution effect, and the net effect of the goods price rise is to increase demand for it.
- Giffen goods are considered to be the opposite of ordinary goods.
- Giffen paradox arises if and only if a good is inferior and the income effect is larger than the absolute value of the substitution effect.
- Giffen goods are non-luxury items that generate higher demand when prices rise, creating an upward-sloping demand curve contrary to standard laws of demand.
- Examples of Giffen goods can include bread, rice, and wheat, which are commonly essentials with few near-dimensional substitutes at the same price levels.
Giffen goods are difficult to study because the definition requires a number of observable conditions, and they are a rarity in economics because supply and demand for these goods are opposite of standard conventions.
