Giffen Good Explained (Why People Buy More Potatoes When Price Is Higher?)

A Giffen good is an economic concept that describes a product for which the demand increases as the price rises and decreases as the price falls, which is contrary to the typical law of demand. In other words, when the price of a Giffen good goes up, people buy more of it, and when the price goes down, they buy less of it. The concept of Giffen goods is named after Sir Robert Giffen, a Scottish economist, who first proposed the idea in the late 19th century. Giffen's finding was primarily related to his observations during the Irish Potato Famine in the mid-19th century. At that time, potatoes were a staple food for many Irish peasants. During the famine, when the price of potatoes increased due to a potato blight, Giffen observed that some people, particularly those with low incomes, actually increased their consumption of potatoes. This seemed to contradict the law of demand. Giffen thought that when the price of potatoes was rising, many people, especially those having a low income, tended to buy more because they couldn't afford more expensive substitutes. This concept was later labeled as a "Giffen good."
Generally, a "Giffen good" usually has some key characters. The first one is that the items must be inferior goods, such as the potatoes in the story. It means that as consumers' incomes increase, they tend to buy less of those items. This is because when people have more income, they can afford superior alternatives. Another key point of Giffen goods is that they typically have no close substitutes available. In other words, consumers will not have alternative options to switch to when the price of the Giffen good increases.

Let's consider this example. The income of a family is 100 dollars per day. When price of potato and meat are 6 dollars and 20 dollars per kilo respectively, this family can buy 10 kilo of potatos and and 2 kilo of meat to satisfy their daily needs. If the price of potato and meat are raise to 8 dollars and 25 dollars per kilo, to satisfy their daily need of 12 kilo food, they have give up meat and buy 12 kilo of potatoes. This is what Giffen good is talking about. When the price of the Giffen good such as potatoes rises, consumers have less money to spend on other expensive goods such as meat. Then, consumers have to switch from meat to potatoes, which increases their potatoes' consumption, even if they'd prefer not to, because they can't afford the more expensive meat. If the price of potatoes keeps rising, the consumption for potatoes will decrease again because those low-income people cannot even afford potatoes.