Giffen’s Goods With Appropriate Examples

Before we begin with discussing Giffen’s paradox and proceed to look at what goods and items come under the purview of this paradox, let us first have a brief refresher of the law of demand. According to the law of demand, with everything else remaining constant, the demand for a particular good increases with a decrease in its price and decreases with an increase in its price. As such, there is an inverse relationship between the price of a product and the quantity demanded.

Demand for a product is, therefore, a function of its price and this relation can be mathematically depicted as:

Qx = f(Px)

Where, x is the product, Qx is the quantity demanded of the product and Px is the price of the product. Giffen’s paradox constitute of those phenomena or demand scenarios that violate the law of demand and various examples of Giffen goods act as exceptions to the law of demand.

What are Giffen Goods?
A Giffen good, as stated above, is that product or good that defies the law of demand in terms of the relationship between its price and quantity of demand. This particular economic paradox was propounded by Scottish economist, Sir Robert Giffen (after whom it’s named). According to this paradox, which Sir Robert Giffen arrived at after observing the purchasing tendency of the poor Victorian subjects, the demand for a particular good tends to increase even when its price increases. Sir Robert Giffen had observed that when the price of necessary staple goods
such as bread, food grain, vegetables, etc., rose, the poorer sections of the Victorian society, who relied heavily on these basic staple items, gave up on purchasing other goods and concentrated all their purchasing power on procuring the necessary staples. This kept the demand for these good high despite an increase in their price.

Conversely, when the prices of these staples go down, the consumer would, out of the consumer’s surplus (the price he has always paid and is ready to pay for the good minus the decreased price) difference that has occurred due to the price plunge, prefer to buy less of the staples and more of superior substitutes for consumption.
There are some pre-conditions so as to explain the Giffen’s paradox:

The goods taken should be inferior goods.
There should be no close substitute.
The goods should cover substantial percentage of the income of the buyer, but not so much that the buyer can’t buy any other normal good.