A Giffen good is a rare type of inferior good where the amount people want to buy increases when the price goes up. This acts against the usual law of demand, which states that higher prices should lead to lower demand.

This happens because the income effect (losing purchasing power) is stronger than the substitution effect (switching to cheaper alternatives).

Conditions for a Giffen Good:

• It must be an inferior good: People buy less of it when they have more money.
• It consumes a large portion of a consumer’s budget.
• There are no close substitutes available.
• The price change is substantial.

How It Works:

1. The price of the item rises.
2. Because it takes up so much of the budget, the consumer feels much poorer (a drop in real income).
3. The consumer can no longer afford better items, so they are forced to buy more of the cheap basic item just to survive.
4. The negative income effect is stronger than the substitution effect, leading to higher demand despite the higher price.

Example:

Imagine a very low-income family that relies mostly on rice to survive. If the price of rice rises sharply, they might become so poor that they can no longer afford meat or vegetables. To stay full, they must spend all their remaining money on even more rice, even though that rice has become more expensive.