The basic idea is that these goods are more attractive as the price goes up, maybe because they are status symbols. When I hear this, I think of Gucci handbags, especially amonst professional women in China.
Can someone give me real life examples that explains the difference between Giffen and Veblen goods?
This is what the books says but I didn’t understand it. Can someone translate that to English?
Giffen goods are inferior goods (negative income effect) while Veblen goods are not.
A Gucci handbag is an example of a Veblen good: the higher price makes it more exclusive / a status symbol, so the demand rises.
An example of a Giffen good would be rice in a very poor economy. Families will eat some rice and some meat (meat being more expensive than rice). If the price of rice rises, they can no longer afford both rice and meat, so they buy more rice (which is still cheaper) and less meat.
You have exactly the right idea there. Veblen goods provide the consumer greater satisfaction (or utility) as the price increases. You can use your Gucci bag example to argue that as price goes up, the consumer will get greater satisfaction from the item (maybe they can brag to their friends or something, lol). These expensive items are essentially just a status symbol, so if you have a trophy wife, she might get more satisfaction from the items if they carry a higher price tag.
To understand Giffen goods, you must understand both the substitution effect and the income effect.
Substitution effect: When the price of a good decreases, there is more consumption of this good. This is always positive.
Income effect: When the price of a good falls, the total expenditure (or portion of your income spent on this good) changes. This can be positive or negative.
A Giffen good is an inferior good (where an increase in income leads to a lower quantity demanded of a product. Think: Top Ramen for a college student. When he gets out of school and starts making it rain, he will buy less cheap food and start dining at Ruth Chris.) when the negative income effect outweights the positive substitution effect.
I hope this helps you make sense of this topic.
so plz explain what a pos/neg income effect is and and pos/neg substitution effect is.
Yeah, now i see what you meant. When I heard “inferior good” I was thinking that the price was the same but the quality was worse.
A positive income effect occurs when you buy more of a good as your purchasing power increases.
A negative income effect occurs when you buy less of a good as your purchasing power increases.
A negative income effect will only occur for inferior goods. For a Giffen good, the item is so inferior that if its price falls you will buy less of it (extremely negative income effect) and that if its price rises you will buy more of it (your income falls so you buy more inferior goods).
Thinking in terms of S2000’s example of rice and meat, if the price of rice rises, you can’t afford any meat so you buy more rice. If the price of rice falls, you will buy more meat (and therefore less rice).
Note that as bryce023 pointed out, the substitution effect is always positive. It’s just that for Giffen goods, the neagtive income effect cancels this out.
Substitution effect: When the price of a good decreases, there is more consumption of this good. This is always positive.
So the word “substitution” has nothing to do with the availability of reasonable substitutes? The example they gave was coffee vs tea in the book. The assumption is that people buy coffee as a source of caffeine, so they buy less coffee and more tea (the assumed substitute). Am I getting confused with two different terms that sound familiar? Thanks, this helped me understand Giffen vs Veblen.