Giffen's products: the paradox of a market economy

The market economy has its own laws, according to which the given science is built. For example, everyone knows the law of supply and demand. There is another law - the ratio of the value of the product and its quantity, Which is demanded. In other words, the higher the price of a product, the less people will want to buy it. But there is always an exception to the rules. It is also present in a market economy. These are the so-called Giffen products.

Two effects of the economy

Before we deal with Giffen's products, let us recall the two main effects on which the laws of economics hold. This is the income effect and the substitution effect.

The income effect shows the relationship between the real profit of the consumer and his demand when prices change. That is, if a product becomes cheaper, you will be able to buy a much larger amount of this product for the amount that was usually spent to buy it. Or, leaving the demand for him unchanged, you will spend money on other goods. Thus, reducing the price will make you richer.

The substitution effect shows how the price of a commodity is related to its demand. So, the cheapening of one kind of goods makes it much more attractive in comparison with other types. That is, the demand for this product is increasing, and they are beginning to replace the more expensive varieties of products.

Giffen Products

Ratio, when the demand increases with a decline in prices, is typical for most products in our market. Their specialists call normal. But there are other goods - Giffen's goods. What is characteristic for them? Why they are separated into a separate group?

The thing is that they do not obey the basic law of the economy. With an increase in prices, there is an increase in demand. Its name was given to the category of goods in honor of the famous economist Richard Giffen. It was he who first noticed and tried to explain this exception from the rules. Therefore, today there is such a thing as Giffen's paradox.

The meaning of it is that with an increase in the price there is an increase in demand for goods. A decrease in cost reduces demand. What is the secret?

Giffen's goods are goods (most often they are called inferior goods), which constitute the bulk of the consumption of a family. That is, if people mostly eat potatoes, and a little money is allocated for meat or fish, Then with an increase in the cost of potatoes, they will refuse meat and fish to buy potatoes in the usual volume.

On the other hand, when the prices for potatoes are lowered, the demand for it will drop, because the money that has been freed can be spent on another commodity.

Examples of Giffen products

Among some experts there is an opinion that such a paradox is characteristic only of underdeveloped countries, in which the population is so poor that it is forced to be satisfied with the consumption of only one commodity. However, this is not quite true. There are Giffen goods in any country. Their distinctive features:

1. They are characterized by low value.
2. They occupy a huge place in the budget of the consumer.
3. Do not have an identical substitute.

For example, for our country, Giffen's goods are tobacco, salt, matches, tea. For China, rice and pasta.

Veblen's products

In addition to Giffen's goods, which are of low value, there is another category - Veblen's products. They behave the same way as Giffen's goods, although they are considered quite prestigious. This phenomenon was noticed by the American sociologist Thorstein Veblen. He called this pattern the effect of conspicuous consumption. The category of such goods includes those that are purchased in order to impress others. Here you can include perfume or jewelry, that is, all those goods that belong to luxury and emphasize the status of the owner.

With a reduction in prices for perfume, they are unlikely to be purchased by anyone, since the buyer is afraid of forgery. In this regard, we can distinguish two types of prices:

• Real, that is the one that the buyer actually paid.
• Prestigious, that is the one that he paid in the opinion of other people.

For such products, the higher the price, the higher the demand, although for quite a different reason than for the products of Giffen.

As we can see, our economy is by no means unambiguous, it contains many exceptions, which have long since become law. The goods of Giffen and Veblen are eloquent proof of this.