Economics, 3rd Edition

A

G

iff

G

d

FIGURE 5.17

Quantity of

potatoes

B

D

0

Quantity

of meat

A

C

E

I

2

I

1

Initial budget constraint

Optimum with high

price of potatoes

Optimum with low

price of potatoes

New budget

constraint

1. An increase in price of

   potatoes rotates the budget

   constraint inwards ...

2. ... which increases

    potato consumption

    if potatoes are a

    Giffen good.

Giffen good 

a good for which an increase in the price raises the quantity demanded

Economists disagree about whether any Giffen good has ever been discovered. Some historians sug-

gest that potatoes were in fact a Giffen good during the Irish potato famine of the 19th century. Potatoes 

were such a large part of people’s diet (historians estimate that the average working man might eat up 

to 14 pounds of potatoes a day) that when the price of potatoes rose, it had a large income effect. People 

responded to their reduced living standard by cutting back on the luxury of meat and buying more of the 

staple food of potatoes. Thus, it is argued that a higher price of potatoes actually raised the quantity of 

potatoes demanded.

Whether or not this historical account is true, it is safe to say that Giffen goods are very rare. Some 

economists (for example, Dwyer and Lindsey, 1984 and Rosen, 1999) have claimed that a legend has 

built up around Robert Giffen and that the evidence does not support his idea. Others have suggested 

that rice and wheat in parts of China might exhibit Giffen qualities. The theory of consumer choice does 

allow demand curves to slope upwards. Yet such occurrences are so unusual that the law of demand is as 

reliable a law as any in economics (see: Dwyer, G.P. and Lindsay, C.M. (1984) ‘Robert Giffen and the Irish 

Potato’. In The American Economic Review, 74:188–192; Jensen, R and Miller, N. (2008) ‘Giffen Behavior 

and Subsistence Consumption’. In American Economic Review, 97:1553–1577; Rosen, S. (1999) ‘Potato 

Paradoxes’. In The Journal of Political Economy, 107:294–213).