Over at Marginal Revolution Tyler Cowen adressed the question whether free trade leads to insufficient diversification or not. His short article contained two well-known terms in economics, viz. "comparative advantage" and "Giffen goods". What made me laugh was that he linked the term "Giffen goods" to Wikipedia (probabliy the web's most famous free encyclopedia), but actually many people (and even economists) have troubles explaining the concept of comparative advantage. If somebody would have asked me what Giffen goods were I would have marbled something like: Well, those are goods whose price elasticity of demand is positive (for certain quantities), i.e. goods that people demand more when its price rises. My accompanying example would have been the worlds most famous energy drink "Red Bull". Bullshit! Blunder! Beeep!!! Thank goodness I followed that link!Positive price elasticity is not a sufficient condition and "Red Bull" can by no means be considered as a Giffen good.
The necessary and sufficient conditions are:
1. The good in question must be so inferior that the income effect
is greater than the substitution effect.
2. There must be a lack of close substitutes,
3. And the good must comprise a substantial percentage of the buyers income.
Now can you find an expample of a Giffen good? Some economists made the claim that rice and noodles are Giffen goods in parts of China. There it could be the case that a rise in the price of rice makes so large a drain on the resources of the poor farmers that they are forced to curtail their consumption of meat foods. Since rice is still the cheapest food which they can get and will take, they consume more, and not less of it (to make it easier for you to get the point assume that they can only choose between rice and meat and assume that the smalles unit of meat one can buy is 250g).
One could argue that Red Bull is a Veblen good. A commodity is a Veblen good if people's preferences for buying it increases as direct function of its price.
Some time has past since I took my last undergrad microeconomics clases... ;-D.
The necessary and sufficient conditions are:
1. The good in question must be so inferior that the income effect
is greater than the substitution effect.
2. There must be a lack of close substitutes,
3. And the good must comprise a substantial percentage of the buyers income.
Now can you find an expample of a Giffen good? Some economists made the claim that rice and noodles are Giffen goods in parts of China. There it could be the case that a rise in the price of rice makes so large a drain on the resources of the poor farmers that they are forced to curtail their consumption of meat foods. Since rice is still the cheapest food which they can get and will take, they consume more, and not less of it (to make it easier for you to get the point assume that they can only choose between rice and meat and assume that the smalles unit of meat one can buy is 250g).
One could argue that Red Bull is a Veblen good. A commodity is a Veblen good if people's preferences for buying it increases as direct function of its price.
Some time has past since I took my last undergrad microeconomics clases... ;-D.
Mahalanobis - am 2004-02-05 04:05 - Rubrik: EconoSchool
