8.10 Giffen good

Goods for which a price increase augments the consumption of this good are called Giffen goods. Such a case is shown here. The underlying utility function is U = x4 (6y)2
The existence of Giffen goods is still disputed. A fairly recent study by Jensen and Miller (2007) can be found here: .
As an example, the phenomenon of a Giffen good will be illustrated with the help of the staple food potatoes. Probably, Giffen goods can be only staple foods for consumers with low income. Let’s assume that a household has a relatively low income, which it must divide between the consumption of potatoes and meat. Due to the low income, the household has to cover a lot of its daily food requirements with potatoes and can only consume little meat. A change in the price of potatoes changes the effective income available to the household. If the price of potatoes increases, the effective disposable income decreases and the household will buy more potatoes and less meat to meet its food requirements. If the price drops, the food requirements can be met in a more balanced manner, which means less potatoes and more meat will be consumed. If the nominal income increases to such an extent that the household no longer has to fear malnutrition and a balanced diet can be financed, the Giffen good potatoes will become a normal good again. The characteristics for a good to be a Giffen good, are only given for limited price ranges and income circumstances.

(c) by Christian Bauer
Prof. Dr. Christian Bauer
Chair of monetary economics
Trier University
D-54296 Trier
Tel.: +49 (0)651/201-2743
E-mail: Bauer@uni-trier.de
URL: https://www.cbauer.de