Giffen Goods – better example than Irish potato famine.

Giffen GoodGiffen goods are a part of most school or university economics courses and in the eyes of theoretical economists it is a good for which demand goes up when prices rise, and falls when prices go down.

Irish Example
A lot of textbooks use the Irish potato famine as a possible example; as the price of potatoes rose, people were so poor that they started substituting potatoes (staple diet) for meat and other unnecessary luxuries. The Irish consumed more potatoes as a result. But a famine suggests a shortage of supply which almost certainly caused an increase in the price.

Chinese Example
However two Harvard economists (Jensen and Miller) used poor Chinese consumers who consume more rice or noodles (staple diet) as prices go up. As with the poor Irish, people need a certain amount of calories to survive. For the Chinese they get their calorie intake by eating rice, vegetables or meat. However to the poor Chinese meat is very expensive and as the price of rice goes up they can no longer afford the luxury of meat, yet they still need to get to their calories. So they eat rice instead, which is still relatively cheap compared to meat. Therefore this is a much accurate example of Giffen behaviour in action.

So if food prices start to increase like they have in the last decade will this mean the demand for the staples will go up even further?

Source: The Economist

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