Giffen: the paradox of the market economy

market economy has its own laws, on which is built this science.Thus, for example, is known to all the law of supply and demand.There is another law - the relationship between the value of the goods and the amount to which a demand.In other words, the higher the price of a commodity, the less people will want to buy it.But there is always the exception to the rule.Present it in a market economy.This so-called Giffen goods.

Two effects of the economy

Before you deal with Giffen, remember the two main effects, which kept the laws of economics.This is the income effect and the substitution effect.

income effect shows the relationship of real income consumer with its demand for a change in prices.That is, if some product becomes cheaper, you're on the amount that is usually spent to buy it, can already buy a much larger number of the product.Or, leaving unchanged the demand for it, to spend money on other goods.Thus, the price reduction will make you richer.

substitution effect shows how the price o

f the goods related to its demand.Thus, reduction of one type of goods makes it more attractive in comparison with other species.That is, the demand for this product is increasing, and they are beginning to replace the more expensive varieties of products.

Giffen

ratio when demand increases with a decrease in prices, typical of most products on the market.Their experts call normal.But there are other products - Giffen goods.What is typical for them?Why are they in a separate group?

thing is that they do not obey the basic law of economics.At higher prices and increased demand occurs.The name of this category of goods received after the famous economist Richard Giffen.It was he who first noticed and tried to explain this exception to the rule.That is why today there is such a thing as a paradox Giffen.

Its meaning lies in the fact that a price increase occurs and increased demand for goods.A reduction in the cost of reducing demand.What is the secret?

Giffen goods - are goods (most often they are called lower), which constitute the bulk of the consumption of a family.That is, if people mostly eat potatoes and meat or fish emit very little funds, with an increase in the cost of potatoes they refuse from meat and fish to buy in the normal volume of potatoes.

On the other hand, with a decrease in potato prices will fall, and the demand for it, because the money can be released to spend on other items.

Examples Giffen

Among some experts are of the opinion that such a paradox is characteristic only for less developed countries, where the population is so poor that they have to be content consumption is only one commodity.However, this is not true.Giffen goods are in any country.Their features:

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

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

Veblen goods

addition Giffen goods, which differ little value, there is one more category - Veblen goods.They behave just like Giffen, though considered quite prestigious.I noticed this phenomenon American sociologist Thorstein Veblen.He called this pattern the effect of conspicuous consumption.In the category of goods are those which are acquired in order to impress others.These include perfumes or jewels, ie all those products that are luxury and emphasize the status of the owner.

By reducing the price of spirits is unlikely anyone will buy, because the buyer is afraid of fakes.In this regard, there are two kinds of prices:

  • real, that is the one that actually paid by the buyer.
  • Luxury, ie the one he paid the opinion of others.

for such goods the higher the price, the higher the demand, albeit for a different reason than for Giffen goods.

As you can see, our economy is by no means straightforward, it contains many exceptions, which have long passed into the category of laws.Giffen and Veblen - eloquent proof of this.