According to sportingology, the hallmark of Giffen goods is that as prices rise, so does the demand for these goods. This contradicts the actual market conditions. If a company wants to sell a new product, it sets a sales price. If the demand is too low, the company lowers the price. If more consumers want to buy the product than expected, the company increases the price.
Development of demand for Giffen goods
This lesson covers the Giffen goods. You will learn what significance Giffen goods have and what explanations there are for the Giffen paradox. Finally, an example should give you the relation to practice. In order to deepen your knowledge, you can answer a few practice questions after the text.
Synonyms: Giffen case | Giffen paradox
What are Giffen goods?
In the case of Giffen goods, the consumer’s idea of being able to afford something that others cannot afford predominates. The provider’s decision to increase the price of its products has a positive effect on those who buy Giffen goods. While the demand for these goods is generally declining, others only decide to buy after the price increase.
A man is overjoyed to eat chocolate. Every day he wants to eat at least three bars. With this specification he defines his first preference. To achieve his goal, he buys two nut chocolates and one almond chocolate every day. He doesn’t like other chocolates. The nut chocolate costs € 1.50. He gets the almond chocolate for € 2.00. Every week he spends € 24.50 on the chocolates.
If the supplier of almond chocolate raises the retail price from € 2.00 to € 2.50, one could assume that the man’s demand for almond chocolate will decrease and that he will consume more nut chocolate. But since the man can financially afford to buy the almond chocolate at the more expensive price, he continues to buy it. This is where the so-called ” snob effect “ comes into play.
The product only becomes really interesting for the man when the provider increases the price. For him it is important that not every consumer will buy the chocolate at the increased price. This makes him stand out from the crowd.
What is the explanation for the Giffen paradox?
The following explanations exist for the Giffen paradox:
- No possibility of substitution
- Snob effect
No possibility of substitution
There is only a lack of substitution possibility if there is no demand for substitute goods. The economy understands substitute goods to be those goods that satisfy the same needs. Substitute goods are z. B. cigars and cigarillos, butter and margarine, cotton and sheep’s wool.
The substitution effect means that a customer turns to a substitute good when other products are too expensive. In the case of Giffen goods, the income effect predominates. It is important for the customer to get exactly the product. Due to his financial situation, he can also afford the purchase.
For some consumers, a product only becomes interesting when it has a certain price. It is important to the buyer that he shows what he can afford.