Readers Question:
You say Giffen goods are rare. Either I misunderstand or you’re very wrong!
You go and stay in a hotel for a week.
Three weeks of the year you go camping.
Camping prices go up.
You still camp but go to a hotel only for a week-end.
To compensate you go camping for longer.
Hey presto! A Giffen good.
A giffen good is an extreme example of an inferior good, where rise in its price causes you to buy more because the higher price reduces your disposable income so much you are forced to consume more of this inferior good.
I doubt your example would occur. The thing is going to a hotel for a week once a year will be only a small % of your total expenditure. Therefore, if camping prices rose, the overall income effect – as a % of your income would be quite limited. If you asked people who camped and went to a hotel – I think you would struggle to find anyone who would actually spend more time camping if camping prices go up.
Research has been done into quality staple food items and inferior staple food items such as r potatoes and meat. In these cases the two goods took a high % of your overall income – so there may be an income effect so great it acts like a giffen good, but, even that is disputed.
2 comments ↓
I disagree with your analysis. Firstly it is not disposable income but discretionary income as we are talking about holidays here.
Secondly, holidays are often taken on a fixed budget. Therefore if the price of camping holidays rose then if you still want the same time away there would have to be a cut back on hotel staying. Thus the extra days freed would then be spent camping.
Instead of camping then (as that is not such a close substitute for hotels) how about a luxury hotel and an average hotel. The same analysis as above:
Fixed budget
Discretionary income
10 day holiday
Average hotel price = £60 a day
Luxury hotel = £180 a day
Budget = £960
= 3 days in the luxury and 7 in the average.
The price of the average rises to £90.
The 7 days would now cost £630 leaving £330 for the luxury – not enough even for 2 days.
So you’d cut back even further on the luxury hotel to one day. (£180)
This still leaves you 9 days (£90 a day) = £990.
If your budget is not flexible enough even for that then you’d just have all ten days in the average hotel (assuming no other hotels around etc)
Hence: Giffen.
If that analysis is correct then the more general point that Giffen goods are scarce is also wrong.
Could anyone comment on my comment please – it really bugs me this Giffen good thing!
Let’s consider something else. Mobile phone prices fall (to boost sales) BUT people think this means poor quality so demand FALLS. Would this too be a Giffen good, a perverse behaviour?
Also look at micro demand. Prices fall, real income rises. If an inferior good then income elasticity then income elasticity tells us demand falls (if inferior) thus aren’t all -ve income elasticity of demand good, Giffen?
Look also at aggregate demand. Price level rises, AD slopes downwards (income effect) BUT fi wages rise faster then surely AD slopes upwards? or shifts but NOT sloping downwards…
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