Veblen and Giffen Goods

There is a fundamental law of economics that says that as the price of a good or service increases, the demand for that product decreases. This is the Law of Demand: if prices are high, people cannot buy as much. But there are some products for which this is not the case.

Veblen Goods do not obey the Law of Demand: as their price increases, so does demand for them. This is a case of conspicuous consumption, people show off and demonstrate their status by buying increasingly expensive products. A £10000 gold Rolex watch does not really tell time any better than a £10 Casio, but owning a £10000 gold Rolex demonstrates that you are so wealthy that you can afford to spend £10000 on a watch. People do not want to buy a £10 Rolex, but they do want to buy a £10000 Rolex, to show off how much money they have.

There are some goods to which the Law of Demand does not apply, and which are not Veblen Goods. These are called Giffen Goods, and on the face of it, they seem to disobey all rational economic rules: demand for them increases even when their price increases, despite the fact that they cannot be used to demonstrate status via conspicuous consumption.

But imagine this situation: You need to feed your family. You normally buy a mixture of expensive (tasty) and inexpensive (staple) products to provide enough nutrition, but also some variety. But one day the price of rice quadruples: now you can’t afford the more expensive products and the rice, and you still need the staple rice to provide basic nutrition. Thus you buy more rice, even though its price has increased, and the rice is a Giffen Good.

2 thoughts on “Veblen and Giffen Goods

  1. I am assuming that the person buys the rice by cutting on purchasing the expensive non-essential products. But are you implying that the person buys more than normal quantities of the staple rice which is more expensive to stock up against future price increases or just that the amount purchased is the same as before and the the demand for the staple product such as rice has been unchanged even after price increase although that’s because consumers have cut spending in other areas?

    Btw, your blog is fantastic. I came across it while searching for the difference between long-term and short-term decay life and their impact on humans. Highschool physics/sciences really needs to be taught in a very different manner from what I learnt in my days :)

  2. “But are you implying that the person buys more than normal quantities of the staple rice …”

    The increase in quantity of rice bought at the higher price would be to compensate for the quantity of the more expensive good that the poor person can no longer afford to buy, because of the increase in the cost of their staple, rice.
    {In a prosperous economy this aggregate effect on the very poor may be swamped by those on higher incomes.}

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