A Giffen good, a concept commonly used in economics, refers to a goods that people consume more of as the price rises. Therefore, a Giffen goods shows an upward-sloping demand curve and violates the fundamental law of demand. Giffen goods can be the result of multiple market variables including supply, demand, price, income, and substitution.

It is important to note that all Giffen goods are inferior goods, but not all inferior goods are Giffen goods. A Giffen goods is a low income, non-luxury product for which demand increases as the price increases and vice versa. A Giffen goods has an upward-sloping demand curve which is contrary to the fundamental laws of demand which are based on a downward sloping demand curve. Demand for Giffen goods is heavily influenced by a lack of close substitutes and income pressures.

Conditions for a Giffen Goods

As noted in the example above, there are certain conditions for a Giffen goods:

 1. The good must be inferior:

The good must be an inferior goods as its lower comparable costs drive an increased demand to meet consumption needs. In a budget shortage, the consumer will consume more of the inferior goods. As indicated in the example above, since rice is an inferior goods, the household will consume more rice to maintain their household budget of $400.

 2. The goods must form a large percentage of total consumption:

The total amount spent on the goods must be large relative to the consumer’s budget. Only in such a scenario will an increase in its price create a significant income effect. As indicated in the example above, rice represents 80% of the quantity demanded of grains. In addition, rice forms half of the household’s expenditure.

 3. There must be a lack of close substitute goods:

The good must either have a lack of close substitutes or the substitute good must have a higher cost than the good. Even if there is an increase in the price of the goods, the current good should still be an attractive option for the consumer. In other words, the substitution effect created by the increase in the price of that goods must be smaller than the income effect created by the increased cost requirement.

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