Giffen Good versus Veblen Good

Both Giffen goods and Veblen goods are special cases of goods where the demand for the good is different from what we would intuitively expect. Whereas most goods are normal good, meaning that we buy more of them when the price decreases, this is not the case for Giffen and Veblen goods. Thus, both goods are exceptions to the law of demand. Despite the commonality between Giffen goods and Veblen goods, there are also important differences between both.

On this page we discuss the Giffen good definition and the Veblen good definition, provide examples of both types of goods and finally discuss the difference between a Giffen Good versus Veblen Good.

Giffen good definition

What is a Giffen good? The existence of Giffen goods was first described by Robert Giffen. Alfred Marshall (a famous economist), in one of his books describes how, when the prices of potatoes went up during the Irish famine, people purchased more potatoes. When this was first observed, this was so strange that it was referred to as the Giffen paradox. In particular, Alfred Marshall could not explain it.

Today, however, we understand the mechanism that was at play. We explain why this increase in potatoes led to an increase in demand in for Giffen goods in example below. More technically, a Giffen good is a good for which the negative income effect dominates the positive substitution effect.

What is the difference between a Giffen good vs an inferior good? A Giffen good is a normal good for some parts of the demand curve and a normal good for other parts of the demand curve. An inferior good, however, is inferior across all levels of demand.

Veblen good definition

The idea of the existence of Veblen goods was proposed in a book by Thorstein Veblen, titled “The Theory of the Leisure class” which was published in 1924. In this book, he describes the upper class of wealthy people in the early 1900s. He discusses the concept of conspicuous consumption, the purchase of expense goods to display economic power.

These luxury goods are referred to as Veblen goods and they become more desirable as their price goes up. Interestingly, the demand curve for Veblen goods is therefore upward sloping. This means that, as the price goes up, demand for it increases. This is different from normal goods, where the demand curve is downward sloping. Below we discuss some examples of goods where the Veblen effect is at play.

Giffen good examples

Let’s continue with example of potatoes discussed earlier. As the price of potatoes goes up, people started to buy less meat, which is generally more expensive and more exclusive, to be able to purchase more potatoes. As a consequence, the relationship between the price of potatoes and the demand for potatoes is positive. Potatoes become a Giffen Good because the Giffen effect is at play.

Another Giffen goods example is the following. Suppose a salesperson has to travel a lot for work. He can choose between first and second class and sometimes uses first class when it is not too expensive. Now, suppose the price for second class tickets increases. We can expect that the salesperson will probably buy more second class tickets. That’s because he cannot decide not to travel. To be able to make all the necessary trips, however, he needs to economise. Thus, even though the price goes up, more second-class tickets are sold.

Veblen goods examples

There are plenty of example of Veblen goods. Almost all luxury products are desired by people to a large part because they are expensive. As they become more expensive, they are more exclusive and thus people tend to desire them even more. Think of expensive watches, cars, diamonds, etc. Other clear examples of Veblen goods are goods that have snob appeal. They are desired by snobs mainly because other snobs own these goods as well.

Giffen Goods vs Veblen goods

Then what is the difference between Veblen goods and Giffen goods, if both have an upward sloping demand curve? The difference is that, while normal goods can become Giffen goods when the Giffen effect is at play, the effect can disappear again. At that point, the demand curve becomes downward sloping again. This is in contract to Veblen goods, where the relationship is typically not temporary. The demand for luxury goods typically does not normalize after a while. Instead, the upward sloping demand curve typically continues to hold for long periods of time.