Question

Explanation: What is "Giffen Behavior" and why must a good make up a very large portion of consumers’ budget to be considered a Giffen good?

Answer 1

Giffen behaviour is related to buying Giffen goods. Giffen goods are those that are purchased (typically by the poor) to get the required intake of , say, daily calorie requirement using the cheapest source. For instance, some communities in South Asia use rice for their daily nutrition requirement as it is one of the cheapest foods. Giffen goods usually show an increase in their demand as a result of a rise in their price, whereas for a normal good the demand goes down with an increase in its price. Since it is usually food items that are Giffen goods and they are a part of the diet of the poor, they make up a large portion of their income. We could also say that even by choosing the cheapest means to fulfil this basic need, the typical consumers of Giffen goods end up spending a large portion of their income on these goods. In other words, if they were to choose normal goods instead (which are likely to be more expensive), they probably won't have enough money to buy the minimum required quantity (nutrition) they need.