Giffen good

This article defines a property of goods: a property that makes sense in the context of a good being bought and sold, and evaluated from the perspective of the buyer, seller, or others affected by it.
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Definition

A Giffen good is an inferior good for which the demand increases with increase in its price, because buyers shift more of their consumption to it from superior, costly substitutes in order to compensate for the extra cost.

Conditions for Giffen goods

Total consumption on the good forms a large part of the budget

The total amount the consumer spends on the good should form a large fraction of the consumer's budget. Only in such a case does an increase in the price of the good create a budget shortage significant enough to cause a shift in other consumption patterns. In other words, an increase in its price should produce a significant income effect.

The good must be inferior

The good must be an inferior good in order for the budget shortage on the part of consumers to cause an increase in consumption. In other words, the good must be inferior for the income effect to increase its consumption due to substitution away from costly and superior alternatives.

Close differences must be absent

Finally, the cost difference with substitutes must be sufficiently substantial that even with the increase in price, it is still attractive as an inferior good. In other words, the substitution effect created by an increase in its relative price should be too small to counter the income effect created by the increased costs.

Evidence

An experiment with rats

An experiment by Battalio, Kagel and Kogut demonstrated the existence of Giffen goods for rats. In their experimental setup, rats had a choice of two drinks: root beer and quinine. Root beer was the expensive and superior drink, while quinine was the cheaper inferior drink. Rats had to pay for the drinks by pushing levers. The experimenters observed that when the price of quinine went up, rats consumed more of the quinine. This was explained by saying that quinine functioned as a Giffen good: as its price went up, the rats' budget got more stressed, so they shifted consumption away from the expensive root beer to the cheaper quinine.

References

Journal references

Experimental confirmation of the existence of a Giffen good by Raymond Battalio, John Kagel and Carl Kogut, American Economic Review, Volume 81,Number 4, Page 961 - 970(September 1991): ^{JSTOR link}^{More info}