2018 Human Bio units 1+2 notes.docx - The Curious Case of the dreaded Giffen Good Paradox The “Law of Demand” states that if the price of a good

2018 Human Bio units 1+2 notes.docx - The Curious Case of...

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The Curious Case of the dreaded Giffen Good Paradox The “Law of Demand” states that if the price of a good should rise, its quantity demanded should fall and where the price of a good should fall, its quantity demanded will increase; resulting with a downward sloping demand curve. The Law of Demand has long been the foundation of microeconomics. However, in the case of the “Giffen Good paradox”, “Giffen Goods” have an upward sloping demand curve due to their nature that is when the price of the good increases, the quantity demanded also increases it thus violates the “Law of Demand”. (Jensen & Miller 2008). A likely occurrence of the dreaded “Giffen Good” was during the 1845-49 potato famine in Ireland, during which families who consumed potatoes ended up consuming more simply because potatoes were considered a “necessity of life” and since its price rose, they were unable to afford meat. Many have attributed the Irish potato example to Robert Giffen, a Scottish economist and statistician (Dwyer & Lindsay 1984). Poorer consumers facing subsistence concerns are more likely to face an upward sloping demand curve. For example, if a rise in the price of bread makes such a large decrease in real income for the already poor consumer and raises the marginal utility of money for them, they are forced to decrease their consumption of more expensive foods such as meats and vegetables. These poorer consumers will then end up consuming more of bread which is the “Giffen Good” in this example and, not less of it (Marshall, 1895). For a good to be Giffen, it must be inferior. Its income effect must be so great that it offsets its substitution effect. This is because if its substitution effect is greater than the income effect, then consumers will be able to substitute to another good thus not ending up consuming more of it. The term “Giffen behaviour” can be used to stress that the Giffen property lies with consumer behaviour through certain circumstances including real income, price of goods and marginal utility of money. This is important to understand so we can see how the Giffen property is dependent on the consumer’s situation. There are certain parameters that are required to give rise to the Giffen Good paradox, these include: Households are so poor, that they face subsistence nutrition concerns, households have a simple diet consisting of an essential good and a fancy good and the essential good has no substitutes and is the cheapest source of calories making up most of their budget. However, in some extreme cases of poverty, there is no existence of Giffen behaviour or a Giffen good even if the three parameters stated above hold. Consider a poor consumer who only consumes bread, if they do not consume a fancy good, they will not be able to exhibit Giffen behaviour.
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So, when the price of bread rises, the poor consumer will have no choice but consume less bread. Finally, the last parameter is that households must not be so impoverished that they do not consume a fancy good (Jensen & Miller 2008). The theory of the Giffen Good paradox
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  • Fall '18
  • maya

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