Word of the Day: Veblen Goods and Giffen Goods (Economics)

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Word of the Day: Veblen Goods and Giffen Goods (Economics)

Wednesday, September 23rd, 2009 | Economics, Word of the Day |

In economics, Veblen goods are a theoretical group of commodities for which peoples’ preference for buying them increases as a direct function of their price, instead of decreasing according to the law of demand.

It is claimed that some types of high-status goods, such as diamonds or luxury cars, are Veblen goods, in that decreasing their prices decreases people’s preference for buying them because they are no longer perceived as exclusive or high status products.^[1] Similarly, a price increase may increase that high status and perception of exclusivity, thereby making the good even more preferable. The Veblen effect is named after the economist Thorstein Veblen, who first pointed out the concepts of conspicuous consumption and status-seeking.^[2]

Hat tip to The Online Photographer’s discussion of Leica camera prices.

See also this discussion of luxury goods and inferior goods, which are economic terms of art that don’t mean quite what you might expect. In a nutshell, inferior goods are things that people buy less of as they get wealthier, while luxury goods are things they buy more of.

Related to that is the more uncommon Giffen goods:

In economics and consumer theory, a Giffen good is one which people consume more of as price rises, violating the law of demand. In normal situations, as the price of such a good rises, the substitution effect causes people to purchase less of it and more of substitute goods. In the Giffen good situation, cheaper close substitutes are not available. Because of the lack of substitutes, the income effect dominates, leading people to buy more of the good, even as its price rises.

Evidence for the existence of Giffen goods is limited, but microeconomic mathematical models explain how such a thing could exist. Giffen goods are named after Sir Robert Giffen, who was attributed as the author of this idea by Alfred Marshall in his book Principles of Economics.

The classic example given by Marshall is of inferior quality staple foods, whose demand is driven by poverty that makes their purchasers unable to afford superior foodstuffs. As the price of the cheap staple rises, they can no longer afford to supplement their diet with better foods, and must consume more of the staple food.

Marshall wrote in the 1895 edition of Principles of Economics:

As Mr.Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it.^[1]

Giffen goods are also related to experience goods and credence goods in that the two often exhibit increases in demand with price, yet different in that close substitutes are available for the latter types.

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