What is the Giffen Paradox? — Exponential Economy #12 (Video)
By: Rafael Badziag
Tags: Exponential Growth, Videos, Giffen, Business, Economy

In this episode of the series Exponential Economy I explain the Giffen Paradox.

Watch this video:

Video transcription:

Hi, today and welcome to the next episode in the series “Exponential Economy”

Today we will be talking about Giffen Paradox

What it is? You will find out in the next part. See you after the break.

Giffen Paradox

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Giffen Paradox describes one of pecularities of price and demand relationship

the normal relationship for normal goods is that if you increase price

the demand drops

or if you lower the price, the demand rises

This is the normal relationship for normal goods

but there are some situations where a different relationship appears

namely an opposite relationship

If you raise the price, the demand for that good actually rises

and this relationship was observed by Sir Rober Giffen in Victorian Era

among the poor people of England

because he was observing their spending habits and he noticed that in some cases

for some inferior goods, something peculiar happens

For example bread.

When the price of bread rises, the poor actually consume more bread

and the demand goes up — why is it this way?

Because a lot of the income is spent on bread

And of course, they eat something else if they can afford that

like meat and maybe vegetables

but if the price of bread rises, it amounts to such a big chunk of the income

that they can’t afford meat or vegetables anymore

but they have to eat something, so they buy more bread just to get in the calories they need

and this phenomenon is called Giffen Paradox

and the goods that show that peculiar behavior, they are called Giffen Goods

but you shouldn’t mix it up with Veblen Goods

because Veblen Goods that I talked about in a different video

you will find a link below this video

Veblen Goods are luxury goods and the motivation for more spending

when the price rises is conspicuous consumption

to show off

and here the reason for the increased consumption of Giffen Good is not conspicuous

It is just pure economic necessity

3 conditions were defined for this Giffen Paradox to appear

The first one, it has to be an inferior good

What is an inferior good?

Inferior good is a good that is less consumed if your income rises

So, it is just a good that you wouldn’t consume in that amount if you had money to buy something else

The second condition is the lack of substitute goods

and the third condition is that the consumption of that good should constitute a substantial percentage of buyers income

And nevertheless the buyer should also be able to consume some so called normal goods that have the normal price / demand relationship

because then we have this effect of replacement that he stops buying some normal goods because he can’t afford it anymore

and he consumes more of that inferior good

So, this is called Giffen Paradox

Another example of Giffen Paradox was observed in China, also among poor people

hen the price of rice goes up, the people stop buying other food supplies because they just can’t afford them

and they start buying more rice in order to be able to survive

So, this if Giffen Paradox. I invite you to leave a comment with maybe more examples of Giffen Paradox

And please don’t mix it up with Veblen Goods and maybe another remark is that Giffen Paradox doesn’t apply to every consumer

It applies only to some consumers, for some goods in some situations, so it is like a very relative term and very specific term

it’s ot something that applies to a full economy or a full category of goods, only for some goods in case of some consumers

So, I invite you to discussion in the comments below, how can we apply this paradox? Maybe what are your observations?

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