Alfred Marshall dominated Economics teaching in England in the first half of the 20th Century. His Principles of Economics was published in 1890 and was a comprehensive statement of most that was to know in the subject, i.e., it served as the major text for anyone studying the subject before the Second World War. In 1946, 22 years after his death, an eighth edition was published. It was not until 1948 that Paul Samuelson¹s ŒEconomics was published and became a standard undergraduate text.

Of nearly 900 pages of Marshall's Principles, 10 lines are devoted to an idea that has since become a legend; Giffen Goods.

³There are however some exceptions. (to downward sloping demand) For instance, as Sir R. Giffen has pointed out, a rise in the price of bread makes so large a drain on the resources of the poorer labouring families and raises so much the marginal utility of money to them, that they are forced to curtail their consumption of meat and the more expensive farinaceous foods: and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it. But such cases are rare; when they are met with, each must be treated on its own merits.²

To sort this out, the income and substitution effect can assist us. Poor people have very limited budgets, and a great percentage of their income goes on buying food. If the price of bread rises their real income falls. For inferior goods a fall in income means more of the good will be purchased, not less. This is a positive income effect because as income falls Qd rises.

as with any good, if the price of bread rises we would expect people to find a substitute product as the price of those products has fallen relative to bread. But for poor people, if the substitute were meat and because meat is more expensive than bread the extra meat they could purchase would not provide sufficient calories to sustain them. So instead of there being a strong negative substitution effect it may be weak.

With inferior goods the negative substitution effect is more powerful than the positive income effect. But in Giffen¹s example, the negative substitution effect is outweighed by a positive income effect. Demand for bread rises when the price goes up.

The Giffen Paradox is much debated but as one economist has noted, if they exist someone should have found them by now. Look at the assumptions, they are very strict. Only bread and meat are on offer, no time period is mentioned either. Economic models are not reality ­they are models and this one although interesting has no evidence to support it. a problem of finding evidence is difficult because as in many models we assume Œother things being equal¹. Whomsoever does find some data to support the Giffen paradox has then to face the charge that some other determinate of demand may have changed and moved the whole demand curve to the right. a similar problem occurs for Veblen Goods.

Giffen Good a special type of inferior good that¹s quantity demanded rises when price rises. a positive income effect outweighs a negative substitution effect.