The market economy has its own laws, according to which this science is built. So, for example, everyone knows the law of supply and demand. There is another law - on the ratio of the cost of goods and their quantity,
which is in demand. In other words, the higher the price of the product, the less people will want to purchase it. But there is always an exception to the rule. It is present in a market economy. These are the so-called Giffen products.
Two effects of the economy
Before sorting out Giffen's goods, let us recall two main effects on which the laws of the economy rest. This is an income effect and a substitution effect.
The income effect shows the relationship of real consumer profit with its demand when prices change. That is, if a product becomes cheaper, you can already buy a much larger amount of this product by the amount you usually spent on its purchase. Or, leaving the demand for it unchanged, spend money on other goods. Thus, lower prices will make you richer.
The substitution effect shows how the price of a product is related to its demand. So, the cost reduction of one type of goods makes it much more attractive compared to other types. That is, the demand for this product is growing, and they are beginning to replace more expensive varieties of products.
Giffen Products
The ratio, when demand increases with decreasing prices, is typical for most goods in our market.
Their experts call normal. But there are other products - Giffen products. What is characteristic of them? Why are they allocated in a separate group?
The thing is that they do not obey the basic law of economics. With rising prices, there is an increase in demand. This category of goods received its name in honor of the famous economist Richard Giffen. It was he who first noticed and tried to explain this exception to the rule. Therefore, today there is such a thing as the Giffen paradox.
Its meaning lies in the fact that with increasing prices there is an increase in demand for goods. And cost reduction reduces demand. What is the secret?
Giffen's goods are goods (most often they are called inferior) that make up the bulk of the consumption of a family. That is, if people mostly eat potatoes, and they donate very little money to meat or fish,
then when the cost of potatoes increases, they will refuse meat and fish in order to buy potatoes in the usual volume.
On the other hand, with a decrease in the price of potatoes, the demand for it will also fall, because the released money can be spent on other goods.
Giffen Product Examples
Among some experts, there is an opinion that such a paradox is characteristic only for underdeveloped countries in which the population is so poor that it is forced to be content with consuming only one product. However, this is not quite true. Giffen's products are in any country. Their distinguishing features:
- They are characterized by low value.
- They occupy a huge place in the consumer budget.
- Do not have an identical substitute.
For example, for our country, Giffen's goods are tobacco, salt, matches, tea. For China, rice and pasta.
Veblen's goods
In addition to Giffen goods, which are of low value, there is another category - Veblen goods. They behave in the same way as Giffen's goods, although they are considered quite prestigious. The American sociologist Thorstein Veblen noticed this phenomenon . He called this pattern the effect of ostentatious consumption.
The category of such products includes those that are purchased in order to impress others. This includes perfumes or jewelry, that is, all those products that are luxury and emphasize the status of the owner.
With lower prices for perfumes, hardly anyone will buy them, since the buyer is afraid of fakes. In this regard, two types of prices can be distinguished:
- Real, that is, the one that the buyer really paid.
- Prestigious, that is, the one that he paid in the opinion of other people.
For such goods, the higher the price, the higher the demand, although for a completely different reason than for the Giffen goods.
As you can see, our economy is by no means unambiguous, it contains many exceptions that have long passed into the category of laws. The goods of Giffen and Veblen are eloquent confirmation of this.