Finding symmetries in an unsymmetrical world ..

Archive for September 2009

There is a phenomenon that has long puzzed the economits view of the supply and demand, and it is the Giffen Goods .

A Giffen good is termed as a good which people consume more of as price rises. If that be it, how is it  that this class of good defies the supply and demand equation ?

The existence of the phenomenon was first identified by a Victorian-era British statistician, Robert Giffen.

There are three necessary preconditions for this situation to arise:

a.The good in question must be an inferior good,

b.There must be a lack of close substitute goods, and

c. The good must constitute a substantial percentage of the buyer’s income, but not such a substantial percentage of the buyer’s income that none of the associated normal goods are consumed.

Water, Rice and other staple foods have long been said to be an example of the Giffen goods.

Here’s another view though :

If rice be a Giffen good , then increase in the price should increase its demand. But if for the same amount of money one can afford much luxurious Meat, why would he buy Rice ?

Is it just because Rice would still be more affordable? But even if that be it, why does the demand rice ?

Looking at it from this perspective :

I consume 4 kgs of Rice and 2 Kgs of meat in a week (Assuming these make up the substancial part of my income.

The price of rice now shoots ,and I can only afford to buy 2.5 Kgs.

But rice still being more affordable I cut down on my consumption of meat,and buy rice instead .

Here’s the trick !

If the price of a Giffen  good increases, then the supply for these “luxurious goods ” must decrease ,and they would become more affordable, as there will be more supply of it due to less consumption !

Wouldn’t they appear to be more affordable?

This is a question that is seldom ever raised in the context of the Giffen Goods.

So, the price of so called “Giffen Good” has a virtually cap, after which the demand for it, Must decrease and it will conform to the normal supply and demand curve .

So here’s my take ( Probably justifying why Giffen Goods is a less noted  phenomena) :

There should be none on the Giffen goods, the goods at best can adhere to the inelasticy of the demand curve, i.e the increase in price doesn’t change the consumption of the so perceived vital goods .

~

ek

I doubt, I think therefore I amRené Descartes


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