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July 14, 2007

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James V. Koch

What's new here? Didn't most of us learn about the possibility of Giffen goods in our micro principles class? The real question is how often the income effect drowns out the substitution effect. (Not very often, it seems.) Hence, other than substituting rice for potatoes, I'm uncertain why the hubbub.

Walt

James, it's been controversial as to whether "not very often" is really "never". This is the strongest evidence to date the answer is not "never".

W Razzak

Many housing agents in New Zealand tell stories about new expensive homes that were advertised for sell at very high prices did not sell for months during the past few years, where the housing market has been boiling. Then they decided to increase the price. These homes were sold in one week. I thought these high price homes are examples of a Giffen good.

Leo B

W - goods of this sort, where utility depends directly on price (perhaps because price signals quality), are known as Veblen goods, and are different from Giffen goods. (Other examples are wine and fine art.) As they say in a footnote to the paper, Giffen goods only assume an income and substitution effect -- prices only matter through their effect on budget sets.

Mike Lazzaro

Perhaps I'm missing something here, but this seems like a simple case of an 'inferior good' situation -- as real incomes rise, buyers shift away from inferior products (rice) to superior products (meat).

Again, I may be misapplying some of the basic assumptions about Giffen goods here, but, to me, it would be more impressive to see an actual case where the value of a product is inversely related to its price, as opposed to simply having an upward sloping demand curve.

For another example of upward sloping demand curves that really have nothing to do with Giffen goods, one could look to Pankaj Ghemawat's "Order Backlogs and Strategic Pricing: The Case of the U.S. Large Turbine Generator Industry" -- in this case, the effect is caused by an umbrella pricing strategy being employed by one of the players. The result? An upward sloping demand curve.

Barkley  Rosser

Mike,

All true Giffen goods are inferior goods, very inferior goods, so much so that their inferiority outweighs the substitution effect.

George Stigler argued that there were no true Giffen goods. Giffen himself was referring to bread in Britain in his original work, not Irish potatoes, as so many misinformed textbooks have long repeated. A problem with the historical data is identification, separating out supply and demand shifts, with changes in supply affecting incomes of farmers as well as price.

Of course another area where we see something that some think is evidence of Giffen goods is in markets with speculation. We see it all the time with bubbles and their ending. Most would argue those are not Giffen goods because demand is shifting. But, they are cases where the only exogenous thing changing is the price, with change in expectations engogenous to the change in price, which does make things a bit messy. I even had a paper on bubbles rejected from a journal once because the referee quoted Stigler on how there are no Giffen goods, and this business of demand rising when price rises in a bubble looks like a Giffen good.

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Isaac Crawford

I'm a little confused. Surely, at best, a demand curve can rise for a part of the overall curve, not for the entire thing. After all, as something becomes more expensive, the less you can buy given a finite budget. I'm interested in feedback on my posting about demand curves here:http://www.isaharr.com/ratchoice/demand/page9.html

I think I've got this pretty much right, don't I?

Isaac

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Hello,I would have one question. How to explain that demand for flats it is raising when prices of flats rise as well? Upward sloping curve is sign of inferior goods, but flat is not inferior?thank you

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For another example of upward sloping demand curves that really have nothing to do with Giffen goods, one could look to Pankaj Ghemawat's "Order Backlogs and Strategic Pricing: The Case of the U.S. Large Turbine Generator Industry" -- in this case, the effect is caused by an umbrella pricing strategy being employed by one of the players. The result? An upward sloping demand curve.http://www.darkfallgoldsale.com/darkfall-power-leveling.html

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