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Follow Up: On The Hunt For The Elusive Upward-Sloping Demand Curve…

May 31st, 2013 · 6 Comments
Econ 101 · Follow Ups

Two years ago, I wrote a post about Giffen goods and the possibility of a demand curve that slopes upwards rather than downwards. Two days ago, presumably via the wonders of search engine optimization, someone on Reddit linked to said post (in a discussion on Bitcoin, strangely enough) with the following commentary:

I usually find her blog posts lacking. At least she didn’t conclude by suggesting that demand curves slope upwards.

To note, all demand curves must slop downwards because of diminishing marginal utility. Ie. The marginal good satisfies a lower valued end. If it satisfied a higher value end then people would chose to satisfy that end first.

The only extent you can say demand increases with prices is if the demand curve shifts to the right. That is to say if people demand less of some other good and shift demand into the good where price is rising.

First, hmph. Second, and more importantly, I was under the impression that I *did* say that demand curves could slope upwards (even taking diminishing marginal utility as a given). In any case, I felt that this was a good opportunity to rejoin the hunt for the elusive upward-sloping demand curve, so I wrote up an article all about Giffen goods here.

I would like to think that I’ve gotten a bit smarter (or at least more knowledgeable) over the years (just go with me here), so I think that a rehashing of Giffen versus Veblen goods is in order. The graphical summary of the issue is this:

Giffen Goods 5

This implies that Giffen goods- highly inferior goods where a price increase of the good makes you feel poorer such that you actually consume more of the good overall, presumably because you switched away from higher-quality options- are the only goods that truly have an upward-sloping demand curve. Veblen goods- goods associated with status and conspicuous consumption- appear to have a positive relationship between price and quantity demanded, but this relationship works via changing tastes rather than as a direct result of price change on quantity demanded.

As in my original post, I’ve taken to stating that the existence of Giffen goods is somewhere above the tooth fairy but pretty much in line with Bigfoot on the scale of credibility. (I considered replacing “Bigfoot” with “whatever the guy on River Monsters thinks he caught that actually ends up being a catfish,” but that is a conversation for another time.) That said, with a bit of help from some nice people on the interwebs as well as from Esther Duflo and Abhijit Banerjee’s book Poor Economics (I think), I can give more evidence as to a legitimate Giffen sighting. From Robert Jensen and Nolan Miller:

This paper provides the first real-world evidence of Giffen behavior, i.e., upward sloping demand. Subsidizing the prices of dietary staples for extremely poor households in two provinces of China, we find strong evidence of Giffen behavior for rice in Hunan, and weaker evidence for wheat in Gansu. The data provide new insight into the consumption behavior of the poor, who act as though maximizing utility subject to subsistence concerns. We find that their elasticity of demand depends significantly, and nonlinearly, on the severity of their poverty. Understanding this heterogeneity is important for the effective design of welfare programs for the poor.

In other words, lowering the price of rice for poor households in China caused the households to consume less rice, which would result in an upward-sloping demand curve. A couple of things are worth noting here:

  • The Giffen behavior was exhibited by low-income households, so an individual household’s demand curve may slope upward while the overall market demand curve still has a downward slope. (This is because the overall market consists of both poor and not poor, or at least less poor, households.)
  • The rice example above is almost an exact parallel of the potato example that I gave in the original post and the linked article, so I’m not sure whether to count it as a truly new example. It is, however, certainly more current and empirically based. I am tempted to revise the definition of Giffen goods to “goods that are a category of necessity and that don’t have a cheaper option to substitute down to.”

Technically speaking, this evidence could still be consistent with my Bigfoot comparison, since you don’t actually know what my beliefs on the existence of Bigfoot are. Also, because the Internet is a beautiful thing, a certain Benjamin Anderson was kind enough to Tweet me the following:

giffen bigfoot

Attention television producers: I would totally be up for a reality show about a search for Giffen goods…and, based on what I’ve seen, it would be more fruitful than what you’ve got going with either River Monsters or Finding Bigfoot.

Tags: Econ 101 · Follow Ups

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