Definition of 'Giffen Good'
Giffen goods are typically basic necessities, such as food and housing. When the price of a Giffen good increases, consumers have to spend a larger proportion of their income on that good. This leaves them with less money to spend on other goods, which can lead them to reduce their consumption of those other goods. As a result, the demand for the Giffen good increases.
The Giffen paradox is the apparent contradiction that a good can be considered a necessity and yet its demand can increase as its price increases. This paradox can be explained by the fact that consumers may have a strong preference for a particular good, even if it is not the most efficient or cost-effective option. For example, a consumer may prefer to buy a particular brand of bread, even if it is more expensive than other brands. If the price of that brand of bread increases, the consumer may be willing to pay more for it, even if it means that they have to reduce their consumption of other goods.
Giffen goods are a rare phenomenon, but they can have a significant impact on the economy. For example, during periods of high inflation, the demand for Giffen goods can increase, which can lead to shortages and price increases. This can make it difficult for low-income households to afford basic necessities.
The Giffen paradox is a reminder that the demand for a good is not always determined by its price. Other factors, such as consumer preferences and income, can also play a role.
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