Goods in Economics : Meaning and Classification

As a result, households engaging in early cashing out would be limited in their ability to do so (since they would have only a small part of the vouchers in hand) and would risk losing the value of all future vouchers if they were caught. For our purposes, the crucial question is whether there was cashing out before the second round of the survey, since this is the only round for which the subsidy was in effect. At the time of the second survey, a significant amount of the benefit of the program still lay in the future, which reduced the incentive to cash out. Giffen goods are rare and unusual, and there are only a few examples that have been identified.

Therefore, while the consumption patterns in Hunan match up well with the basic conditions under which we predict Giffen behavior, in Gansu the patterns do not fit quite as well due to relatively low consumption of meat (the fancy good in our setup). Beyond documenting the existence of Giffen behavior, our field experiment also provides an opportunity to study more broadly the consumption behavior of the “extreme poor,” a population that worldwide includes more than one billion people living below the World Bank’s extreme poverty line of one dollar per person per day. These households, like Marshall’s “labouring families” and those in our sample, are often highly dependent on a single staple food for the bulk of their nutritional needs. Consequently, fluctuations in the prices of these staple foods can have large effects on real wealth and purchasing power.

Goods in Economics : Meaning and Classification

A number of economists have suggested that shopping at large discount chains such as Walmart and rent-to-own establishments vastly represent a large percentage of goods referred to as “inferior”. Consumers will generally prefer cheaper cars when their income is constricted. As a consumer’s income increases, the demand for the cheap cars will decrease, while demand for costly cars will increase, so cheap cars are inferior goods.

• First, all foods in China are sold in free markets, at market determined prices.
• In this case, as illustrated in panel B of Figure 1, we expect the consumer to respond to an increase in the price of the staple good by consuming less of it.
• Selecting just the very poorest, or even aggregating over a broader set of households that includes both those in the calorie-deprived and subsistence zones, may not be sufficient.
• 15We chose urban areas because in smaller towns or rural areas many of the poorest households grew rather than purchased their staple food, and lower population density meant fewer households living in extreme poverty, which would have both required a greater number of sample clusters and prevented varying the treatment within clusters.
• 25Using the percent change in consumption per capita yields nearly identical results to those in Table 4.

These goods are commonly essentials with few near-dimensional substitutes at the same price levels. As indicated in the example above, rice represents 80% of the quantity demanded of grains. As indicated in the example above, since rice is an inferior good, the household will consume more rice to maintain their household budget of $400. The law of demand applies in the case of normal goods; however, in the case of inferior goods, the law of demand is not applicable. 25Using the percent change in consumption per capita yields nearly identical results to those in Table 4.

Income and substitution effects

Giffen goods are those inferior goods on which the consumer spends a large part of his income and the demand for which falls with a fall in their price. The term “Giffen goods” was coined in the late 1800s, named after noted Scottish economist, statistician, and journalist Sir Robert Giffen. The concept of Giffen goods focuses on a low income, non-luxury products that have very few close substitutes.

• Battalio, John H. Kagel, and Carl A. Kogut (1991) find evidence of upward sloping demand among rats given limited “budgets” and the choice between root beer and a quinine solution, and R.
• Giffen goods are rare types of inferior goods that have a paradoxical relationship between price and demand.
• If a household consumes their staple food in many forms and the price of one increases, they may not need to engage in Giffen behavior because they can reduce consumption of that one and increase consumption of the other, substitutable forms of the staple that did not experience the price increase.
• Shmuel Baruch and Yakar Kannai (2001) use the lagged prime interest rate as an instrument for the price of a low-grade Japanese alcohol (shochu), which is likely be a poor predictor of the price of shochu, or, to the extent that it does predict the price, will likely also affect the prices of substitutes (or income—and thus demand).
• While this is unlikely to happen often in reality because the price of all the forms of the staple will be linked to the price of the raw ingredient (here, wheat), the unique structure of our subsidy did just that, subsidizing only the form of the staple prepared at home, and not the close substitutes purchased in stores.

Using consumption surveys gathered before, during, and after the subsidy was in place, we find strong evidence that poor households in Hunan exhibit Giffen behavior with respect to rice. That is, lowering the price of rice via the experimental subsidy caused households to reduce their demand for rice, and removing the subsidy giffen goods example in india had the opposite effect. In Gansu, the evidence for Giffen behavior is somewhat weaker, due to the partial failure of two of the basic conditions under which such behavior is expected; namely that the staple good has limited substitution possibilities, and that households are not so poor that they consume only staple foods.

I. Giffen Behavior and Consumption among the Poor

However, it is of course possible that larger subsidies create stronger signaling effects, so these results do not imply there were no such effects at all. 16While it may seem difficult to recall or estimate how many grams of, say, rice were eaten with a meal, for the extreme poor who are on a very limited budget, food is often apportioned and accounted for much more carefully. Further, diets for these extremely poor households often vary little or not at all from day to day, except on special occasions, so recalling the quantity of specific food items is not as difficult. In this case, the price of potatoes increased, and despite the fact that consumers could not afford to purchase other goods, they actually increased their demand for potatoes, which were a staple part of their diet.

As we noted, the demand for rice rose from 40 kg to 43 kg despite its increase in price. Economic goods are scarce goods and we have to make payment for the use and consumption. All the man-made goods where supply is scarce and limited and have some market value are economic goods.

Examples of inferior goods are hamburgers, frozen dinners, noodles, and canned goods. When they experience a rise in income, they tend to avoid these products and buy more expensive ones. Inexpensive foods like instant noodles, bologna, pizza, hamburger, mass-market beer, frozen dinners, and canned goods are additional examples of inferior goods.

TABLE 4

Similar policy prescriptions may arise if there is a concern, often stated, that simply giving cash is not desirable because households may spend it on other luxuries (food or nonfood). However, our results suggest even these price-based policies will face similar difficulties by virtue of the large wealth effects they create. Giffen goods are a rarity in economics because supply and demand for these goods are opposite of standard conventions. Giffen goods can be the result of multiple market variables including supply, demand, price, income, and substitution. All of these variables are central to the basic theories of supply and demand economics. Examples of Giffen goods are a study in the effects of these variables on low-income, non-luxury goods which result in an upward sloping demand curve.

Battalio, John H. Kagel, and Carl A. Kogut (1991) find evidence of upward sloping demand among rats given limited “budgets” and the choice between root beer and a quinine solution, and R. J. DeGrandpre et al. (1993) find in a laboratory setting that human smokers, given the choice between brands of cigarettes and a limited budget of “puffs,” can exhibit Giffen behavior. With these concerns in mind, a number of safeguards were built into the experimental design.

Focusing our analysis on those whom the theory identifies as most likely to exhibit Giffen behavior, we find stronger evidence of its existence. Finally, although historically the primary importance of the Giffen phenomenon has been pedagogical, we believe it also serves a more fundamental role in economic theory. The neoclassical model of the consumer is one in which the consumer maximizes stable preferences subject to a budget constraint, and in recent years this model has come increasingly under attack. These objections run from the simplistic, “people don’t maximize” arguments to the sophisticated criticisms found in psychology and behavioral economics. The possibility of Giffen behavior is a clear, complex, nuanced prediction of the neoclassical model.

If not as compelling as the evidence in Hunan, the results are at least suggestive of Giffen behavior in Gansu. Gansu also departs from the ideal conditions for Giffen behavior in that wheat as a staple is consumed in a number of other forms that may act as substitutes for each other, many of which are not made directly by consumers at home from wheat flour. Unfortunately, our experimental design failed to account for this additional complexity.36 In Hunan, the staple good, rice, is consumed typically only in its basic form.

Practical Example of a Giffen Good: Hunan and Gansu

Thus, economists looking for Giffen behavior at the level of the market are unlikely to find it. Yoram Barzel and Wing Suen (1992) argue that if consumers can exploit intertemporal variations in prices, they will never purchase more of a good when its price increases. The very poor, however, are likely to be liquidity constrained and thus lack this ability. Those who are so poor that they cannot achieve subsistence nutrition will consume a very high proportion of their food in the form of the staple good, regardless of size and activity level.

If we limit our analysis to just these two counties, we find a positive coefficient for all staple calorie share thresholds, though due to the smaller samples, the coefficients are not statistically significant. It is also worth noting that the results present somewhat more positive news about household vulnerability. Our results suggest that in fact households in the subsistence zone are able to buffer their staple consumption against such changes quite well (unless perhaps the price changes are very large). However, there may still be a value in offering such assistance to households in the calorie-deprived zone, or perhaps even households in the subsistence zone (though the justification would have to be on general welfare, rather than nutritional, grounds). But here, again, the heterogeneity of consumers is important to take into consideration.