Are Giffen Goods Real?

Treść źródłowa

Any student of price theory will know of the theoretical possibility of an upward-sloping demand curve (when the price of the good goes up, the quantity demanded goes up). This type of good is called a “Giffen good.” What if demand isn’t downward-sloping? Isn’t this a problem for price theory? After all, if both the supply and demand curves are upward-sloping, it is possible to get very different price responses when the supply or demand curve shifts. For example, for a Giffen good, it would be possible that sudden reduction in supply might cause a reduction in the price, depending on the slope of the demand curve relative to the supply curve. This seems counterintuitive and empirically false. Nonetheless, the fact that this is a theoretical possibility seems like it could be a pretty significant problem for price theoretic analysis.A lot of people dismiss Giffen goods as sufficiently rare that we don’t have to think about them. Others suggest that it is a theoretical possibility, but not not empirically relevant. I would like to take a much stronger stance on the issue and argue that upward-sloping demand is entirely the result of certain assumptions of the price theoretic framework. If we take uncertainty about prices seriously or if we allow for intertemporal decision-making, then the demand for Giffen goods is actually downward-sloping like all other demand curves.Where Does the Theoretical Possibility Come From?Let’s start by thinking through the theoretical possibility of a good for which the quantity demanded increases in conjunction with the good’s price. Recall tha…