Higher price to push higher demand? Griffen goods and business opportunities.
In micro-economics, theory of demand says that if price of a certain good raises then its demand declines. However there is a paradox called Griffen goods (1). Under certain circumstances and certain goods or services, higher price pushes higher demand and lower price pushes lower demand. They are the so called Griffen goods. That model comes as an explanation to the "Irish potato effect" during a famine some centuries ago. It means that householders that spent on potatoes 90% of its budget and 10% in meat will increase consumption of potatoes and reduce meat if price of potatoes raises while price of meat remains and their nominal purchasing power -wages- remains too. Because they cannot afford meat due to rise of potatoes. Probably because its source case -Irish potato during famine-, Western economists use to analyse it under certain constraints: it applies only to food -or very basic goods that satisfy very basic needs-, only for extreme poverty, etc. For them, Griffen goods exist only in micro- economic theories, not in real world. Maybe they do not find actual cases because they seek in wrong places and wrong circumstances - famine, food, extreme poverty, developing countries, etc.-. But we can see "Griffen effect" from a broader perspective. "Griffen appears only under some requirements: First, houselders are spending at their purchasing power limit, we can realise it when saving rate is zero or close to zero. Second, householders cannot find substitution - another good- that satisfies their needs as the Griffen good does, we can realise it if demand falls even while price falls -such as retail sales fell last months in some economies-. Even broader. Why to apply it just to final consumers and not to business-to-business trade? Some factories have to buy more of a certain product as its price raises because budget limits and competitive output price requires to redefine product mix. Exactly what consumers do under "Griffen effect". Also, the conception of "basic needs" and "inferior good" that satisfies them differ from one economy to other and even inside every particular economy. For example, if people have not access to a kitchen either processed food or veggies are "basic" for survival and the cheapest way to feed families. Is car and gaz a basic need for business if public transportantion dose not exist and free transportation such as bike or walk are not feasible due to highways, time to market, etc. I wonder if we are in the prelude of some "Griffen effect" in some developed economies. Then my question is: then can we call developed economy to that suffers "Griffen effect"?. Before the end of 2010 we will know. For those interested, "Giffen effect" gives business opportunities too and it closes doors to others. Peace and best wishes. Xi (1) http://en.wikipedia.org/wiki/Giffen_good --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "World-thread" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [email protected] For more options, visit this group at http://groups.google.com/group/world-thread?hl=en -~----------~----~----~----~------~----~------~--~---
