Can a Price Rise Make People Buy More? Only If They Are Poor Enough

The case involves a cheap staple food that makes up a large share of a poor household's spending, with no cheaper substitute available. When its price rises, the household becomes effectively poorer overall, and being poorer it can no longer afford the more expensive foods it was buying alongside the staple. It replaces those with more of the staple, because the staple remains the cheapest available source of calories. Consumption of the staple therefore rises even though its price went up, which is the opposite of the ordinary response.

All of these must hold at once, which is why it is rare:

• •The good is inferior, meaning demand falls as income rises
• •It absorbs a large fraction of the household's budget
• •No cheaper alternative exists to switch down to
• •The household is close to subsistence
• •The income effect of the price rise outweighs the substitution effect
• •Remove any one and the ordinary response returns

The case was named after Robert Giffen, who was said by Alfred Marshall in 1895 to have observed it in bread among the very poor, and the attribution is doubtful since no such claim has ever been found in Giffen's own writing. Attempts to document the effect in historical data, including the Irish potato famine, have repeatedly failed on closer analysis. For a century it was regarded as a theoretical curiosity that may never have occurred. A field experiment in Hunan and Gansu in China, published in 2008, subsidised rice and wheat for poor households and found behaviour consistent with it, which is the strongest evidence available.

A second case is frequently confused with this one and works by an entirely opposite mechanism. Certain luxury goods sell more as their price rises, because a high price is itself the attraction and signals status to observers, so cutting the price of such a good can reduce demand for it. That effect operates through what the price communicates rather than through any squeeze on a budget, and it applies to the wealthy rather than to the desperate. The two are the only well known exceptions to the usual direction of demand and they could hardly be less alike.

A phenomenon this rare earns its place in the curriculum for what it exposes rather than for how often it happens. A price change does two things at once, making the good expensive relative to others and making the buyer poorer overall, and ordinary examples let students treat those as one thing. This case separates them by making the second larger than the first, which forces the distinction to be understood rather than assumed. It also demonstrates that a basic law of demand is an empirical regularity rather than a logical necessity, which is a useful thing to know about any such law.

When a cheap staple takes most of a household's budget and has no cheaper substitute, a price rise makes the household poorer, forcing it to drop better foods and buy more of the staple. The attribution to Giffen appears to rest on nothing he wrote, and the strongest evidence is a Chinese field experiment published in 2008. It is taught because it separates the two effects of a price change.