Question

A columnist on forbes.com noted that many poor people have diets that are high in carbohydrates, such as potatoes, rice, or bread, with relatively little protein from meat or fish. He said that as a consumer in this situation, if the price of the carbohydrates in your diet rises, "you'll cut out the more expensive fish, bacon or pork in order to buy more of that basic carbohydrate. And that's what a Giffen Good is." Explain his reasoning that in this situation the carbohydrate is a Giffen good.

Short answer

The carbohydrate in this situation is considered a Giffen Good because despite an increase in its price, the low-income consumers are consuming more of it by cutting back on pricier items to suffice their basic needs, hence deviating from the conventional Law of Demand.

Step-by-step solution

Definition of Giffen Good

A 'Giffen Good' is a type of product that people consume more of as its price increases. This violates the basic law of demand in economics, which states that as price increases, quantity demanded decreases.

Analyzing the columnist's statement

According to the columnist, for a person with a lower income, when the price of a staple (like carbohydrates) increases, the person might cut out more expensive items (like fish, bacon, or pork) to buy more of this basic staple. This happens because when the price of a staple food increases, the consumer's purchasing power decreases. To compensate for this, the consumer will reduce consumption of other, more expensive goods and instead, purchase more of the staple to meet their basic needs.

Conclusion

From the given scenario, we can conclude that in certain situations, a good (like carbohydrates) can become a 'Giffen Good'. Despite a rise in price, people might consume more of it due to the necessity of that good, particularly if they have to cut back on more expensive items as a result.

Key concepts

Law of Demand

Imagine you love buying candies. Under normal circumstances, if the price of candies goes up, you'd probably buy less, right? Because that's just how things usually work with most goods. This principle is what economists call the "law of demand." In essence, it suggests that as the price of something rises, the quantity you demand of it tends to fall.
This happens because as prices become higher, our purchasing power decreases, meaning we can buy less with the same amount of money. So most people adjust by reducing their consumption.
However, Giffen goods flip this law on its head. Instead of buying less when prices climb, people might actually buy more. It's a rare situation and quite fascinating in the world of economics!

Consumer Behavior

Consumer behavior describes how people make decisions about what they buy. We all have unique preferences and budgets, which influence our purchasing choices. Generally, as prices go up, our inclination to buy usually goes down, because we're trying to stretch our dollars further.
For hungry people on a tight budget, carbohydrates might be a staple food. They're cheap and can fill you up quickly. Now, if the price of these carbohydrates, like rice or bread, increases, you might think they'd buy less. However, if meat and other proteins are already too expensive, consumers might end up buying more carbs instead.
This is how consumer behavior sometimes goes against the grain—pun intended—of typical economic rules, particularly for individuals facing financial constraints. Giffen goods illustrate how people might buy more of something essential, like carbs, when its price rises, simply because they can't afford to buy pricier alternatives.

Income Effect

Income effect is another important concept in understanding Giffen goods. It's all about how changes in income, or effective income after a price change, influence what and how much we buy.
When prices go up, it's like getting an income cut—suddenly, your money buys less than it used to. This is called the negative income effect.
For those buying basic necessities, this usually means having to adjust what they buy. Instead of buying less overall, for Giffen goods, the adjustment might involve cutting back on luxuries and buying more of the staple good whose price rose.
So, the income effect can lead to more consumption of a good, despite its rising price, because people have to focus on necessities at the expense of non-essentials. This defies the typical expectations of the law of demand but makes perfect sense for someone prioritizing survival basics over variety.