The Law of Demand says: higher prices → lower demand. But for "Giffen goods," higher prices lead to HIGHER demand! How can this be?
A family has a fixed budget for food. They can buy bread (cheap, filling) or meat (expensive, nutritious).
Total spending: $20.00
When bread price rises, the family becomes effectively POORER. They can no longer afford meat at all! Since they MUST eat, they buy MORE bread to get enough calories—even though bread is now more expensive. The income effect (being poorer) overwhelms the substitution effect (switching to cheaper goods).
The Irish Potato Famine (1845-1852): As potato prices rose due to blight, poor Irish families bought MORE potatoes because they could no longer afford meat or other foods. Potatoes were their only affordable source of calories.
Chinese Rice Studies (2008): Jensen and Miller provided the first rigorous empirical evidence for Giffen behavior. When rice prices were subsidized (lowered), poor Chinese households actually bought LESS rice—they could now afford more variety.
Requirements for a Giffen Good:
Named after: Sir Robert Giffen (1837-1910), Scottish statistician who allegedly observed this during Victorian-era bread shortages. Though the attribution is disputed, the paradox bears his name.
The only confirmed exception to the Law of Demand—proof that economics is messier than textbooks suggest.