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What is Giffen Good? Practical example?
What is Giffen good?
What are giffen goods? Giffen goods, in English, Giffen goods. Giffen goods are inexpensive, non-luxury goods, contrary to economic theory and the laws of supply and demand. Demand for Giffen goods increases when price increases and demand decreases when price decreases. In econometrics, this results in the demand curve sloping upward instead of downward according to the basic law of demand curves.
Practical example of giffen good
* Example 1: When a consumer has a fixed income and wants to buy two items, A and B, in which A is a Giffen product and B is a normal product, then when the prices of A and B increase, Consumers tend to reduce purchases of common goods (B), but because A is an essential item that must be purchased, consumers accidentally have an "excess" amount of budget due to not buying B, thereby having more budget. books to buy more A, causing more buying of A. This concept is defined as the “Income Effect”.
* Example 2: Suppose a basic grain like rice is a Giffen good. As the price of rice increases, low-income consumers may not be able to afford alternative items such as fresh food. In this case, they are forced to continue buying rice even though the price increases, because rice is the main source of energy and they have no other choice, which increases the demand for rice.
>>See more: What are secondary goods?
Giffen goods and the knowledge you need to know about this type of goods
What is Giffen Good has been answered and next is other knowledge you need to know about Giffen Goods:
Supply and demand of Giffen goods
In the case of Giffen goods, the income effect can be significant along with the impact of the substitution effect. For Giffen goods, the upward sloping demand curve indicates more demand when the price is higher. Because there are few substitutes for Giffen goods, consumers continue to be willing to buy Giffen goods when prices increase.
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Because Giffen goods are necessary, consumers are willing to pay more for this type of goods, but they also limit their disposable income, causing them to reduce spending on other higher-cost items or even not buy them. Okay. The income effect and the substitution effect both work to create unique supply and demand outcomes.
The reason why Giffen good goes against the law of supply and demand
Giffen goods differ from normal goods because their demand increases when prices increase. This is in direct opposition to the normal law of supply and demand, in which demand decreases when prices increase. Giffen goods go against the usual supply and demand rules, possibly because:
- Substitutability: Giffen goods often do not have suitable substitutes in the market, meaning there are no equivalent products that can substitute for it. So when prices increase, consumers have no other choice and will continue to buy Giffen products even though prices increase.
- Basic needs: Giffen goods are often essential items in consumers' daily lives. So consumers need to buy this product regardless of whether the price is high or low. Even though prices increase, consumers still have to buy Giffen goods because they are necessary for life and daily activities.
- Changing the "consumption move": With Giffen goods, when prices increase, consumers will have to change their consumption move to consider personal finances. This may lead them to consume more Giffen goods, despite higher prices, and reduce consumption of other items.
=> In short, Giffen goods go against the normal law of supply and demand because there are no suitable substitutes, have basic needs and can change consumption moves when prices increase.
The difference between giffen products and poor quality products
Giffen goods and poor quality goods are very similar, in which giffen goods are special types of goods. Both of these products do not follow the general demand patterns laid down in economics and therefore the particular types of products consumed by customers differ as market prices and income levels change.
Giffen goods are goods whose demand decreases when prices fall because people do not tend to buy more good giffen goods even when the price is low because they will look for better alternatives, or will spend their money. into something else. As income increases, people will spend less on inferior goods because they can afford more expensive, higher quality options.
The basic difference between Giffen goods and poor quality goods:
- Goods whose demand increases with an increase in their price are called Giffen goods. Goods whose demand decreases with an increase in consumer income above a certain level are called poor quality goods;
- Giffen goods have no close substitutes, but inferior goods have better quality alternatives;
- Giffen goods violate the law of demand, while inferior goods are part of consumer goods and services – the determinant of demand;
- When there is a price decrease, the overall price effect in the case of Giffen goods will be negative. Given this for inferior goods, the price effect will be positive, as there is a decrease in price;
- The demand curve for low-quality goods slopes downward but slopes upward for Giffen goods.
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The most accurate method to identify Giffen goods
To determine whether any goods are Giffen goods or not, you can use the following method:
- Step 1: Determine the supply and demand chart
Draw a supply-demand chart for that good. The horizontal axis is the quantity of the good consumed and the vertical axis is the price of the good.
- Step 2: Determine the demand curve
Determine the demand curve, that is, the decreasing-shaped curve that represents the relationship between the quantity of a good consumed and the price.
- Step 3: Identify assumptions
Suppose the price of the good increases…
- Step 4: Consider changes in demand
Change the price of the good and watch demand build. If the quantity of a good demanded increases after the price increases, then the good may be a Giffen good.
- Step 5: Check conditions
Check whether the quantity of the good consumed increases due to another additional factor such as the consumer's income. If there are no other additional factors that increase consumption, the goods can be considered Giffen goods.
* Note: Determining whether a good is a Giffen good or not requires deeper economic analysis and is based on actual data. You should consult economic experts for a more accurate assessment.
What is Giffen Good and knowledge related to Giffen Goods has been answered. From here, individual consumers as well as units and businesses will also have more appropriate production, business and consumption plans for goods/products. Please continue to follow and follow news stories related to secondary goods, internal consumer goods, direct sales invoices, and VAT invoices. And contact immediately 0909 344 247 when you need to use the cheap parcel, motorbike, car,... transportation service to North and South at Proship.
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