The Giffen Effect as a Harbinger of Crisis
Posted: Tue Dec 24, 2024 7:49 am
Empty store shelves, from which essential goods were instantly swept away, and subsequently mezzanines filled with buckwheat, matches and salt are familiar to many firsthand. This concept even has a name - the Giffen effect (as it turns out, there is a motive, and it is not human stupidity at all). The phenomenon was first noticed by Robert Giffen, an American economist and financial observer. In fact, thanks to him, the concept received its name. What is the essence of the phenomenon?
Giffen effect
Giffen effect: specifics
The fundamental law of economics – the law of argentina email list supply and demand – says: an increase in the price of goods leads to a decrease in demand and vice versa: a decrease in cost increases demand. But there are a number of goods to which it does not apply.
Giffen paradox, Giffen effect or Giffen effect is an increase in the cost of certain goods, which also leads to an increase in demand.
Such offers are called core goods or lower-order goods, they occupy an important place in the consumer basket, they have no analogues and there are no substitutes for them. As a rule, their consumers are people with low or average income.
What products are we talking about?
Giffen goods are unique to each country, depending on market offerings, cultural characteristics, and food preferences. They can generally be divided into several categories:
food products (buckwheat, pasta, rice, bread, lentils, flour, potatoes, sunflower oil, salt, canned goods);
essential goods (matches, soap, toilet paper, and, more recently, medical masks and antiseptics);
money (when the dollar exchange rate rises, people rush to stock up on this currency);
fuel (gasoline and kerosene).
At the same time, buyers of these products reduce their consumption of everything that is more expensive: fish, fruit, meat, meat products, sweets, or even refuse to buy them at all. In fact, expensive offers are being replaced by Giffen products: customers believe that they can do without them.
What products are we talking about?
How to explain the effect?
There is an explanation for the paradox, and it is not mass insanity, as is commonly believed. And the income effect and the substitution effect explain everything. The second is usually tied to the first.
The essence of the income effect is that the consumer's demand is affected by his income level. An increase in the cost of the above-mentioned goods reduces the population's income, even if the salary remains the same: it can buy fewer of these goods than under normal conditions.
Substitution effect - as the cost of goods increases, a search for products that can replace the price increase occurs.
In this case, the income effect overcomes the substitution effect: there are simply no substitutes for giffen goods.
What does the Giffen paradox indicate?
The Giffen effect would be a good fit for the role of the fifth horseman of the apocalypse. After all, it is evidence of a crisis, and of absolutely any nature. It accompanies catastrophes, natural disasters, epidemics, defaults, coups, wars, crop failures, etc.
In rare cases, it occurs during manipulation. This happened in early 2009 in Ukraine with table salt. Rumors about the closure of salt mines, rising prices for salt and the disappearance of the product from the shelves, actively fueled by media publications, led to an artificial shortage: salt began to be stocked up for years to come. Although the company's management denied the rumors in every possible way.
Moreover, the paradox can arise both locally - on the territory of one region or country, and globally. The pandemic has become proof of this, and everyone has felt the phenomenon on themselves.
Join and choose thousands of products for wholesale and dropshipping from Ukrainian suppliers for your business, upload products to your online store!
Giffen effect
Giffen effect: specifics
The fundamental law of economics – the law of argentina email list supply and demand – says: an increase in the price of goods leads to a decrease in demand and vice versa: a decrease in cost increases demand. But there are a number of goods to which it does not apply.
Giffen paradox, Giffen effect or Giffen effect is an increase in the cost of certain goods, which also leads to an increase in demand.
Such offers are called core goods or lower-order goods, they occupy an important place in the consumer basket, they have no analogues and there are no substitutes for them. As a rule, their consumers are people with low or average income.
What products are we talking about?
Giffen goods are unique to each country, depending on market offerings, cultural characteristics, and food preferences. They can generally be divided into several categories:
food products (buckwheat, pasta, rice, bread, lentils, flour, potatoes, sunflower oil, salt, canned goods);
essential goods (matches, soap, toilet paper, and, more recently, medical masks and antiseptics);
money (when the dollar exchange rate rises, people rush to stock up on this currency);
fuel (gasoline and kerosene).
At the same time, buyers of these products reduce their consumption of everything that is more expensive: fish, fruit, meat, meat products, sweets, or even refuse to buy them at all. In fact, expensive offers are being replaced by Giffen products: customers believe that they can do without them.
What products are we talking about?
How to explain the effect?
There is an explanation for the paradox, and it is not mass insanity, as is commonly believed. And the income effect and the substitution effect explain everything. The second is usually tied to the first.
The essence of the income effect is that the consumer's demand is affected by his income level. An increase in the cost of the above-mentioned goods reduces the population's income, even if the salary remains the same: it can buy fewer of these goods than under normal conditions.
Substitution effect - as the cost of goods increases, a search for products that can replace the price increase occurs.
In this case, the income effect overcomes the substitution effect: there are simply no substitutes for giffen goods.
What does the Giffen paradox indicate?
The Giffen effect would be a good fit for the role of the fifth horseman of the apocalypse. After all, it is evidence of a crisis, and of absolutely any nature. It accompanies catastrophes, natural disasters, epidemics, defaults, coups, wars, crop failures, etc.
In rare cases, it occurs during manipulation. This happened in early 2009 in Ukraine with table salt. Rumors about the closure of salt mines, rising prices for salt and the disappearance of the product from the shelves, actively fueled by media publications, led to an artificial shortage: salt began to be stocked up for years to come. Although the company's management denied the rumors in every possible way.
Moreover, the paradox can arise both locally - on the territory of one region or country, and globally. The pandemic has become proof of this, and everyone has felt the phenomenon on themselves.
Join and choose thousands of products for wholesale and dropshipping from Ukrainian suppliers for your business, upload products to your online store!