A Giffen good is a type of product which people consume more of as its price increases. The existence of Giffen goods is a conclusion drawn from basic microeconomic theory, even though this theory almost always produces models in which demand decreases as price increases. This type of outcome can only exist when a variety of conditions are met. It is important to note that real changes in consumer desire do not enter into the picture for these goods. That is, demand for the good increases with price not because expensive items appear more desirable, but because of a particular effect related to income. The Giffen good is named after Sir Robert Giffen, a 19th century economist.
It is often an assumption in microeconomics that demand for a good correlates negatively with its price. The slope of the curve, called elasticity, can be steep, shallow, or nonlinear, but it almost always has a first derivative of zero or below. Giffen goods break this rule by virtue of a microeconomic principle called the income effect. The income effect refers to changes in consumer preference resulting from changes in the amount of money available to them. People with less money, generally speaking, will consume fewer and/or less expensive goods.
A product is revealed as a Giffen good when an increase in prices has a substantial enough effect on the consumer's income that it forces them to consume more of the good. Relatively inexpensive food staples are usually used as the example for this effect. An increase in the price of the staple reduces available money to such a degree that consumers actually buy more of the staple, since they can afford less of everything else. That is, even though the staple has increased in price, it is still less expensive per calorie than most other foods.
For a long time, Giffen goods were mythical beings of economics, a theoretical possibility that had never been found in reality. A 2007 paper by Jensen and Miller, published in the American Economic Review, provided a fairly substantial example. It concluded that, in the Hunan province of China, rice was indeed a Giffen good. In this provice, rice was a staple food consumed in sizeable quantities by all familiies. It was much cheaper than all other foods, which people also consumed, but in smaller quantities. Increases in the price of rice cut heavily into families' food budgets, decreasing their purchasing power. As a consequence they bought less meat—which was still more expensive—and more rice!
