The Indiana Jones of Economics, Part I

A few years back the Wall Street Journal dubbed me the Indiana Jones of economics.

JensenRobert Jensen

In reality, that title more rightfully belongs to Robert Jensen, an economist at Brown University who is doing some of the most interesting and adventurous economics studies these days. Jensen has documented how cell phones revolutionized fish markets in India, how simply telling students in the Dominican Republic once about the high value of an additional year of school can impact their choices years later, and how introducing T.V. into rural India affects the position of women.

The real reason I call Jensen the Indiana Jones of economics is because of another paper he has written in which he and co-author Nolan Miller set out to find one of the elusive Holy Grails of economics: a Giffen good. A Giffen good is one where increasing the price for the exact same good actually leads people to buy more of the good. In economic terms, the price elasticity of such a good is positive, rather than negative. The way economists measure elasticities is often by looking at what is called an “arc elasticity.”

Jensen tells his story in three parts which we will post over the next three days, aptly entitled “Raiders of the Lost Arc Elasticity.”

Raiders of the Lost Arc Elasticity, Part I

By Robert Jensen

Several years ago, my colleague Nolan Miller and I set out on a thrilling adventure. OK, this being economics, both “thrilling” and “adventure” are relative terms. But, the story does involve the search for an elusive, fabled prize shrouded in mystery, travel to far-off lands, and the promise of immortality. We had set out to find a Giffen good, a journey we just recently completed.

So, what’s a Giffen good? It’s a (theoretical) violation of one of the most sacred and holy laws of economics: the Law of Demand. It has excited and intrigued economists for over a century, though no verified example had ever been found.

The Law of Demand says that if the price of a good goes up, the quantity demanded decreases. A Giffen good is one where when the price goes up, the quantity demanded increases. It’s named after Sir Robert Giffen, a 19th century British civil servant and economist who is believed to have first suggested the possibility.

How might this happen?

Imagine you are extremely poor, just barely able to afford enough to eat. And for simplicity, pretend there are only two foods: a basic, staple food like bread that gives you a lot of calories and fills your stomach at a relatively low cost, and a luxury food like meat, that tastes good (indulge me, vegetarians) or adds variety to your diet, but is very expensive, offering few calories per dollar.

So, if you’re really poor, you’ll eat a lot of bread to fill your stomach and get your calories — then with whatever money you have left over, you buy a bit of meat to make yourself happy.

You’re going merrily along like this, until the price of bread goes up. Now you can’t afford the same bundle of bread and meat you were buying before. You have two choices:

1. Eat less bread and more meat.
2. Eat more bread and less meat.

Actually, if you enjoy being alive, you really only have one choice: option two.

The problem with option one is that if you cut back on bread, you lose a lot of calories and a lot of bulk to fill your stomach. And because meat is so expensive, you get very few calories from the small amount you add to your diet. So, since you were just barely getting enough to eat before, you would end up with too few calories and a grumbling stomach. Eventually, you might even end up dead.

But if you instead cut back on meat and eat even more bread than before — while you may enjoy your diet less — you’ll at least get enough calories and fill your stomach. Really, you have little choice. So you break the Law of Demand: the price of bread goes up, and you end up eating more of it.

Anyone who has ever sat through introductory economics has probably heard about Giffen goods. Maybe you were told about potatoes during the Irish famine. If so, you were mislead. The potato example has been disproved.

The search for an alternative example has lead economists to explore crazy, far-out cases, like the demand for fermented whale bile among river-dwelling southern Kazoo from 1873 to 1875. But these searches always came up empty.

In fact, just a few years before his death, Nobel Laureate George Stigler wrote that the best proof that no Giffen good exists is that whoever found one would attain immortality (in the economics profession, anyway, which is one-half a step above being the most famous asphalt engineer) — and since this is such a great reward, people must have already looked everywhere for one.

Despite this declaration, we were determined to find the elusive Giffen good!

(Oh, the blog title. For technical reasons, the way you explore demand is through estimating an “elasticity,” which tells you how the quantity demanded changes when the price changes — all in percent terms.

In the Giffen case, where quantity demanded increases when price increases, you would have a positive price elasticity. And for even more technical reasons, you really want to estimate the “arc” price elasticity. Yes, a long way to go just for a bad pun).

So, to rephrase: We were determined to find the elusive positive arc price elasticity of demand!

Next time: Catastrophe strikes!


I don't buy the logic of the bread and meat example. If someone is so poor that they only buy bread and meat then raising the price of bread should be equivalent to cutting their income or raising all food prices.

Shouldn't a Giffin good apply regardless of income level. Isn't the distinguishing characteristic that price goes up with all else being equal.

And by extension would a "middle class" family buy more meat in this example?


Years ago my fraternity ran a fireworks stand to raise money for a charitable cause. There were three "fountains" that were identical in wholesale price and, presumably, quality. The wrappers were all different colors. We would pick one color and charge $.25 more for it. We always sold more of the more expensive color even though the quality was the same. Is that what we are discussing here?


The article talks about looking for Giffen goods amoung necessities like the bread/meat example. I would look for a Giffen good in frivilous luxury items.

1.Diamonds - The more they cost, the more people buy them in order to show off. Are diamonds disqualified because the supply is manipulated by a cartel? In that case...

2.Handbags - Not the practical ones that most of our wives and girlfriends own. I'm talking about the latest high fashion accessory by the top designer seen on the arms of Hollywood stars. These things are not popular because they do a better job helping the owner carry around her makeup. They are popular because they are expensive and the more expensive they are, the more people want to buy them.


I think the Eliot Spitzer scandal has shown us a strong example of a Giffen Good.

Doug B

Most of the innacurate descriptions above are describing Veblen goods, not Giffen goods. Check the Wikipedia link in the original story to see the difference.


Thanks, David. Neither definition in the original post defined Giffen Goods as "inferior" though the example given does represent that. I retract my earlier suggestion ( #18) that liquor bottles may be Giffen Goods, though I do think it's still a case of negative price elasticity in that the rising price is the only thing driving up the demand in certain places.

What I find most interesting about my example, even though I now see it's off-topic, is that you may have a known quality of the goods, but their utility is actually limited by their price. For example, let's say I know I favor a certain bottle of alcohol, and I know that people such as those who I am entertaining have enjoyed the taste of it in the past. I might still decide NOT to purchase it if the price is too low because I don't want to be seen buying a cheap bottle. So I buy a more expensive bottle that I like less. Contrast this with the lock or tennis instructor examples where price becomes a proxy for quality. In my example, I would KNOWINGLY pay more for a known decrease in quality because the price IS the utility. These are not Veblen goods, because it's not perceived quality I am paying for, but literally paying for price itself. What do economic studies say about this?



The wiki article suggested it was only in the case of an inferior good, like the bread and meat.

Another example I can think of in that style, if you replace time with money. If I like to drive some of the way to work and walk the rest of the way, and my car becomes slower (higher time cost to travel the same distance) I might have to drive all the way to work to arrive on time.


It's called "takeaway selling" in marketing, the point when demand is so high that raising prices would not deter consumers at all, well until a certain threshold of course.


Tim Harford (The Logic of Life) has discovered a Giffen good, albeit not with humans. Rats given a chance to buy two goods to drink (quinine or root beer) picked a certain ratio in order to survive. They clearly preferred the root beer to the quinine water. When the price of quinine went up (rats, of course, did not have money but operated on the understanding that the behavioral economists would set the prices relative to one another) they actually consumed more. Why?

The essentialized example that I have developed is this; suppose rats (or humans) need 10 units of liquid a day. The price of quinine is .50 c, while the price of root beer is 3 times that, 1.50. A rat might consume 5 units of quinine and 5 units of root beer, totaling their 10 units. Imagine the price of quinine doubled, to $1. A rat, to survive, must consume 10 units of quinine and no root beer. Thus, a Giffen good.

This was proven in the lab. This is, however, a two-good world. A Giffen good would only work in a scenario where all the substitutes are linked in price except for the good facing price changes.



If the cost of a seat in a corporate box at a sporting event is increased, then it's not just "it must be better because it's more expensive" (as in other examples) but the consumer may think he will have better company in the corporate box.

It's the same principle as the school in Argentina. Or a neighbourhood with high prices, buyers might think they'll get better neighbours.

Another possibility is if money paid is going to a charity - people may attend a show where most of the takings are going to charity.

Time to check what Wikipedia has to say.

Libin Z.

I think people are confusing Giffen goods with Veblen goods. The examples of fancy champagne and high end bars are Veblen goods. For those products, increasing the price changes the value of the good, so it doesn't count as a Giffen good (which assumes that the nature of the good itself does not change).
For the bread example as a Giffen good, the higher cost of the bread does not change the nature of the bread to make it more desirable (actual shift in demand curve).



If water is considered a normal good, and incomes are assumed to have been increased on average across the US, then the increased demand for bottled water could be due to rising incomes, and would be reflected in a positive income elasticity rather than a positive price elasticity. It could also be a combination of the two.

Graham J.

I'm a freshman Economics undergrad in college, I also recently tried to find a Giffen Good. I've created a rough draft of what could be a scenario of a Giffen Good, and I welcome criticism and comments:

Suppose we have a person, Jack, that must choose between buying two goods: garbage (x) and everything else (y). For given prices of each, and given his income, Jack chooses an optimal bundle of these two goods where his utility is highest.

Now suppose that Jack's income (that affects his decision of choosing these two goods) comes from an outside source; he is completely disconneted from the actual work that goes into generating this income. Somehow, Jack has been able to generate his income by stealing assets unknowingly from his sworn enemy, Jill (this could done because Jack is using a computer virus that siphons money not unlike the one used in "Office Space").

Jack dislikes Jill so much, that he gains utility from buying the garbage and placing it on Jill's front yard in the middle of the night. Additionally, the fact that he is spending Jill's money and making her worse off, gives Jack additional utility (z) for each of Jill's dollars spent. However, if Jack was using his own money to finance his late night escapades, this additional, outside utility varaible would be non-existant (z=0). The fact that the money was once Jill's is a huge factor for Jack's ultilty: he dislikes her so much that he gains ulitity just by seeing the funds spent to harm her.

Therefore, it is feasible that if the price of garbage (x) goes up, Jack will choose to consume more garbage, instead of less, because he gains more utility in seeing Jill's assets deplete faster while continuing to put more and more garbage on her front lawn.

It is most likely that garbage will only be a Giffen good for a small or local time period in Jack's demand schedule, becuase more and more
garbage bought will be harder and harder to transport to Jill's house, and he will increase his chances of being caught in the act. He will also have to spend more of Jill's assets on everything else (y) so as to finance the garabage dumping: more trucks, more labor, and more ski-masks.



Here in Argentine we have free public schools and non-free private schools. In a poor neiborhood, a cheap private school can have more customers if increases (a little bit) the price, because not-so-poor fathers think that will keep the poorest kids away. Is not a perfect Giffen good, because if the price keeps increasing people will send kids to public schools, but I think it works like a Giffen good in a limited range of prices. Am I rigth?


I'm not an economist, either. However, pretty much everyone on this blog seems to be confused about the definition of what a giffen good is. The key element is that the product in question has to be an "inferior good" not a "normal good". It is true that for certain luxury items (eg. Liquor in bars) people may buy more if the prices are raised, however, it is also true that people will buy more luxury items as their income rises. This is the definition of a "normal good". As income increases more of the good is demanded. An inferior good is where the opposite occurs. As income rises people will begin to substitute other products for that inferior good. So, in the this blog, bread is an inferior good, because as income increases meat becomes more desirable and bread becomes less. If the supply and demand curves are correct then people will buy less of an "inferior good" if the prices are increased. The key here is that if bread is such an important part of the diet then people will be forced to buy more of the good even though the prices have been increased because they can no longer afford to substitute it with anything else.



baseball cards?


In my introductory mico class, we were given the example of tennis lessons. An instructor wouldn't get customers when he charged $15.00 per hour, but would get plenty when he charged $50.00 per hour. Buyers thought that such a low price was probably a sign of poor quality.


I'm not an economist and didn't know about Giffen goods until I read this blog post but I did already understand the concept.
I think you get Giffen goods whenever a customer is incapable of determining the quality of a good by looking at it.
My favorite example of this is locks. Only an expert can tell from the outside whether a given lock would be susceptible to lock picking, normal consumers can't. In the absence of this knowledge the consumer falls back to a basic quality assumption: You get what you pay for. The belief that products that are expensive are of high quality (which is based on the assumption that high quality would be expensive to produce and therefore require a higher price). Other products where I would expect the same effect are clothes, alcohol, prostitution and jewelry.


Aren't there many examples of products being re-branded as luxury items (requiring an increase- sometimes large- in price)... and successfully selling more?

There has to be some sort of designer purse that was, say, selling for $10. Then the manufacturer (through demand or as a marketing gimmick) raises the price to $100 and sells more.

Alexandre V. B. Netto

No, the way the narrative was told we were lead to think that the amount of bread he consumed before was already sufficient to sustain him, so this amount alone would suffice to keep him alive. If you are not convinced yet, read again this paragraph: "So, if you're really poor, you'll eat a lot of bread to fill your stomach and get your calories - then with whatever money you have left over, you buy a bit of meat to make yourself happy."

So i don't see this guy eating more bread after price rises. He would demand the same quantity of bread (i.e. the quantity necessary to sustain him) and less meat.