<p>Yes, whether a good is a Giffen or inferior good depends on "the circumstances", or to be more narrow, it can depend on the income and price levels.</p>

<p><strong>Claim 1.</strong> Being an inferior good is a local attribute.</p>

<p><strong>Proof.</strong> Suppose a good <span class="math-container">$x$</span> is inferior for all income levels <span class="math-container">$I$</span> and all price vectors <span class="math-container">$\mathbf{p}$</span>. Trivially demand for <span class="math-container">$x$</span> at <span class="math-container">$I = 0$</span> is 0. If <span class="math-container">$x$</span> is inferior for all income levels, then for any <span class="math-container">$I &gt; 0$</span> demand for <span class="math-container">$x$</span> is also 0. This contradicts the strict definition of inferior good, which specifies that as <span class="math-container">$I$</span> increases <span class="math-container">$x$</span> should decrease.</p>

<p><strong>Claim 2.</strong> All Giffen goods are inferior goods.</p>

<p>This is covered in some detail in textbooks, usually in a chapter that mentions the "Slutsky-equation".</p>

<p>Combining the two claims we have that being a Giffen good is also a local attribute; as being Giffen everywhere would imply being inferior everywhere, and we have shown that that is not possible.</p>

CC BY-SA 4.0
2020-05-26T09:44:23.950Z
@TanYongBoon: What is YED?
VARulle
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2020-05-26T09:58:13.657Z
@VARulle Income elasticity of demand
Tan Yong Boon
CC BY-SA 4.0
2020-05-26T14:51:18.653Z
@TanYongBoon: Well, then a negative YED and a positive income effect of a price increase are essentially the same, but they are *not* equivalent in *all* situations. You can construct preferences such that at a demand of 0 you have YED > 0 while a small price change doesn't change the optimal bundle.
VARulle
CC BY-SA 4.0
2020-05-23T15:53:09.693Z
(+1). By the way which textbook did you get the proof from? I usually seen this been treated just in text
1muflon1
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2020-05-23T15:56:24.187Z
You mean Claim 1 and Claim 2? I came up with Claim 1, and Claim 2 is in several textbooks.
Giskard
CC BY-SA 4.0
2020-05-23T15:59:11.580Z
oh okay, yes I thought that maybe there is some book that has some more detailed treatment for these than others which made me interested, because Giffen goods are interesting topic but many texts just brush them off in few paragraphs
1muflon1
CC BY-SA 4.0
2020-05-23T21:52:26.233Z
Couldn't this be achieved in a single step? Claim: Being a Giffen good is a local attribute. Proof: Suppose good 1 is a Giffen good for all price levels. Consider a price vector with demand $x>0$ for good 1. Increase the price of good 1 until bundle $(x,0, ..., 0)$ is no longer affordable. Then demand for good 1 is smaller than $x$, contradicting the global Giffen property.
VARulle
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2020-05-23T21:59:03.370Z
(Just saw that exactly that is already argued in the last paragraph of the question...)
VARulle
CC BY-SA 4.0
2020-05-24T02:45:00.413Z
From what I know, there appears to be two definitions of inferior goods. There is the one based on YED less than 0 and then there is this one where there is a positive income effect when the price of the good increases. Are these definitions essentially the same? Or are they different?
Tan Yong Boon
CC BY-SA 4.0
2020-05-23T15:43:09.673Z
2020-05-23T15:43:09.673Z
Giskard
<p>The textbook example of a Giffen good is the potato during the Irish Potato Famine. It is characterised by a positive income effect that is larger than the negative substitution effect when the price of the good increases. During the famine, the increased price of potatoes counterintuitively led to an increase in the quantity consumed of potatoes. This was because potatoes were likely one of the only available staples for the peasants and that alternatives may have been significantly more expensive. Hence, the increased consumption of potatoes and a diversion away from more expensive foods was observed during the famine. This makes sense in the context of the peasants having very low, limited incomes and that other staples or foods were either unavailable or far more expensive. </p>

<p>If the circumstances were changed and say, rice or noodles, were cheaper than potatoes, I am certain that there would be a drop in the quantity demanded for the potatoes given the increase in price. Hence, I would like to ask if it is possible to assert that a good can be considered a Giffen good only under the appropriate circumstances? That is, the income and substitution effects would play out differently given different circumstances and under certain circumstances, these effects would be opposite with the income effect being larger. </p>

<p>In fact, if you think about it, given a sufficiently large increase in the price of potatoes, the quantity demanded would have to decrease as it really becomes unaffordable and the peasants may have to resort to consuming less of it and find some other substitute. Hence, the Giffen good behaviour would only be observed for a particular price range and not below or above that. </p>

<consumer-theory><giffen-goods>
Whether a good is a Giffen good should be based on circumstance?
Tan Yong Boon
# Whether a good is a Giffen good should be based on circumstance?

(Asked by: username_0 on 2020-05-23)

The textbook example of a Giffen good is the potato during the Irish Potato Famine. It is characterised by a positive income effect that is larger than the negative substitution effect when the price of the good increases. During the famine, the increased price of potatoes counterintuitively led to an increase in the quantity consumed of potatoes. This was because potatoes were likely one of the only available staples for the peasants and that alternatives may have been significantly more expensive. Hence, the increased consumption of potatoes and a diversion away from more expensive foods was observed during the famine. This makes sense in the context of the peasants having very low, limited incomes and that other staples or foods were either unavailable or far more expensive.

If the circumstances were changed and say, rice or noodles, were cheaper than potatoes, I am certain that there would be a drop in the quantity demanded for the potatoes given the increase in price. Hence, I would like to ask if it is possible to assert that a good can be considered a Giffen good only under the appropriate circumstances? That is, the income and substitution effects would play out differently given different circumstances and under certain circumstances, these effects would be opposite with the income effect being larger.

In fact, if you think about it, given a sufficiently large increase in the price of potatoes, the quantity demanded would have to decrease as it really becomes unaffordable and the peasants may have to resort to consuming less of it and find some other substitute. Hence, the Giffen good behaviour would only be observed for a particular price range and not below or above that.

**Tags:** consumer-theory, giffen-goods


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## 1 answers

### Answer by username_1 on 2020-05-23. Score: 3 | Accepted answer

Yes, whether a good is a Giffen or inferior good depends on "the circumstances", or to be more narrow, it can depend on the income and price levels.

**Claim 1.** Being an inferior good is a local attribute.

**Proof.** Suppose a good $x$ is inferior for all income levels $I$ and all price vectors $\mathbf{p}$. Trivially demand for $x$ at $I = 0$ is 0. If $x$ is inferior for all income levels, then for any $I > 0$ demand for $x$ is also 0. This contradicts the strict definition of inferior good, which specifies that as $I$ increases $x$ should decrease.

**Claim 2.** All Giffen goods are inferior goods.

This is covered in some detail in textbooks, usually in a chapter that mentions the "Slutsky-equation".

Combining the two claims we have that being a Giffen good is also a local attribute; as being Giffen everywhere would imply being inferior everywhere, and we have shown that that is not possible.

> **Comments:**
> **username_3**: (+1). By the way which textbook did you get the proof from? I usually seen this been treated just in text  
> **username_1**: You mean Claim 1 and Claim 2? I came up with Claim 1, and Claim 2 is in several textbooks.  
> **username_3**: oh okay, yes I thought that maybe there is some book that has some more detailed treatment for these than others which made me interested, because Giffen goods are interesting topic but many texts just brush them off in few paragraphs  
> **username_2**: Couldn't this be achieved in a single step? Claim: Being a Giffen good is a local attribute. Proof: Suppose good 1 is a Giffen good for all price levels. Consider a price vector with demand $x>0$ for good 1. Increase the price of good 1 until bundle $(x,0, ..., 0)$ is no longer affordable. Then demand for good 1 is smaller than $x$, contradicting the global Giffen property.  
> **username_2**: (Just saw that exactly that is already argued in the last paragraph of the question...)  
> **username_0**: From what I know, there appears to be two definitions of inferior goods. There is the one based on YED less than 0 and then there is this one where there is a positive income effect when the price of the good increases. Are these definitions essentially the same? Or are they different?  
> **username_2**: @username_0: What is YED?  
> **username_0**: @username_2 Income elasticity of demand  
> **username_2**: @username_0: Well, then a negative YED and a positive income effect of a price increase are essentially the same, but they are *not* equivalent in *all* situations. You can construct preferences such that at a demand of 0 you have YED > 0 while a small price change doesn't change the optimal bundle.  

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