“Every Giffen good is an inferior good. But every inferior good is not a Giffen good.” Every undergraduate textbook on microeconomics will have this statement while discussing consumer behaviour. I wonder whether we would have remembered Robert Giffen had it not been for Alfred Marshall’s influential (at the time, in 1890) Principles of Economics. Most students read contemporary textbooks, not what are known as classics. Marshall wrote, “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.” Had they read the classics, they would have known that farinaceous means something with starch, based on the Latin for ground wheat, or flour. If the price of a good goes up, we consume less of it. The reverse also holds and this is known as the law of demand. A Giffen good violates this principle. When the price goes up, we consume more and vice-versa. This is explained by breaking up what happens into an income effect and a substitution effect.

An inferior good is one where income increases lead to a decline in demand and vice-versa, contrary to what one might expect. Public transport might be an example, since I switch to private transport as income increases. If the price increases, the relative substitution effect will make me switch to other goods. For a Giffen good, the perverse income effect........

© Indian Express