Are grains a Giffen good? Also does circumstances make a good - Giffen good?

Question

I was going through microeconomics course and I came across the Giffen good. Now I have a scenario with me. A family only buys grains and chocolate from the shop and the price of grain is increasing. So the family is going to buy the same quantity of grains - let us say 5kg. Now the money left is only sufficient to buy half a chocolate bar. And in the market this isn't available. So the family thinking that the price of grain will further increase, buys a little more of grain, say 250 grams. Now my question is, Can I use this case to explain what is a Giffen good?

Answer 1

Giffen good has to be inferior good for which income effect dominates the substitution effect and typically lacks close substitutes (Frank Microeconomics and Behavior 103-104).

Hence, first you have to decide whether grain is normal good. That is, do people buy more grain when their income increases or do they buy less grain as people don't like to eat grain and grain related products as they get richer.

Problem is that grain is quite a big category, there might be some grains that are inferior goods (e.g. perhaps wheat and rice) and some that are normal good (whole wheat) and some could be even considered luxury goods (normal goods with very high income elasticity), such as kasha.

So you can't just automatically declare all grains inferior goods, you have too have closer look at what product you are dealing with.

Second, you need to check whether income effect dominates substitution effect empirically. For example, potatoes are often used as an example of Giffen good, but they are not generally Giffen good, just in some places where empirically the income effect dominates the substitution effect from prices. Thus this has to be empirically checked.

Regarding the story in the question:

A family only buys grains and chocolate from the shop and the price of grain is increasing. So the family is going to buy the same quantity of grains - let us say 5kg. Now the money left is only sufficient to buy half a chocolate bar. And in the market this isn't available. So the family thinking that the price of grain will further increase, buys a little more of grain, say 250 grams. Now my question is, Can I use this case to explain what is a Giffen good?

This is not completely correct explanation of how this works. If the family expects grain to get more expensive in the future and they buy now, that does not make it Giffen good as that is people making different intertemporal choice in response to future expected price change.

A correct story would be something like this. Suppose family likes to eat chicken and rice. Rice is the majority of the meal chicken is just few pieces mixed in it. Now suppose rice gets more expensive so family cannot afford chicken anymore. The family might buy little bit more rice to replace the calories that it would normally get in the chicken so demand for rice would increase despite higher price. However, note this is not because family expects rice to get even more expensive in the future. That would no longer be a Giffen good, that would be now different intertemporal consumption patter. When we talk about demand being downward sloped (or upward for Giffen good) we mean at a point in a time. In time demand simply shifts in response to various factors.

Answer 2

Now the money left is only sufficient to buy half a chocolate bar. And in the market this isn't available. ... Can I use this case to explain what is a Giffen good?

Yes, and as the price of the chocolate bar rises, they will save up more for it. In reality, the only Giffen goods are rather superior.

If the price of the ordinary substitute falls, this Giffen good rather treats the substitute as a complement with windfall budgets. If the price rises, so will the expectation of the advanced payment, trust, or value card. The materiality of chocolate shouldn’t change, so prices still do not rise for this reimbursement arrangement alone, but they are inelastic until settled for such complex material purpose trustee beneficiary.