Section Navigation pg-18

Giffen goods are goods that exhibit upward sloping demand curves. A complete explanation of Giffen goods will have to wait until Chapter 4. Consumer choice: Section 8. Income & Substitution Effects. For now, it's enough to know that their demand curves will be upward sloping.13 What follows is a simplified explanation of how a giffen good can have upward sloping demand.

In many countries there are extremely poor families and individuals who can barely afford enough food to survive. Usually there is one available food that is far cheaper than any other. Depending on the part of the world such a food might be corn, rice, potatoes or wheat.

For very poor families or individuals even such inexpensive food represents a large part of their budget or total expenditure. If the price of this staple food rises they must continue to buy it because all other foods are still far more expensive, but now they are able to afford even less of the other foods. Thus, they end up having to buy more of the cheapest food because its price rose. Likewise, if the price of the staple food falls it frees up money enabling them to buy other, more expensive foods and add more variety to their diet and so the reduction in the price of the staple food may lead them to buy less. So, demand for this good will be upward sloping.

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13

Don't worry if you don't understand this footnote as it refers to an advanced topic and is only included for completeness. It is only the ordinary demand curve that would be upward sloping for a giffen good. The compensated demand curve will still be downward sloping.

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