It is an interesting concept that violates the Law of Demand.

As we have learned already, economists classify goods into two broad categories – 1) Ordinary goods (Normal Goods), 2) Giffen goods (Inferior Goods). You can learn more about these two types here.

This blog will discuss giffen goods which fall into the category of inferior goods. To start with, let’s start with the price of a laptop. According to the law of demand, if the price of laptops increases, one would expect people to demand less of them. However, economic theory also allows that a price increase might generate more, rather than less, demand.

 

Types of Goods (by Mr fabs – Own work, CC BY 3.0, )

 

A price increase has two effects that may contradict each other: a higher price makes consumers shift spending towards other, cheaper goods, but in addition, the price increase reduces consumers’ purchasing power, cutting real income. Some goods, such as laptops, tend to be demanded less when income falls.

Another category of good known as inferior goods is demanded more as income falls. In economics and consumer theory, a Giffen good is a product that people consume more of as the price rises and vice versa[1]. Unlike demand curve, Giffen goods have upward sloping curve. The demand for these products increases, when the price increases and falls when the price falls. These products usually don’t have any substitute[2].

 

 

Poor households spending most of their income on a basic staple suffer a large fall in real income if the price of the staple rises. Households may respond by cutting out non-essential items like meat or sugar and spending even more on the staple. Some have claimed that during the Irish famine of the 19th century, potatoes were such a Giffen good.

 


Reference:
[1] https://en.wikipedia.org/wiki/Giffen_good
[2] https://www.investopedia.com/terms/g/giffen-good.asp

Image Credit
[1] By Mr fabs – Own work, CC BY 3.0, https://commons.wikimedia.org/w/index.php?curid=8793446