Demand, the law of demand, Giffen and Veblen effects. Part 1. Functional demand

This paper provides a concise review of national educational and scientific literature addressing the law of demand and its exceptions. It critically examines common inaccuracies, misconceptions, and misinterpretations, particularly regarding the law of demand and the Giffen effect. The analysis identifies two prevalent sources of error.

The first is a careless formulation of the law of demand, often expressed as an inverse proportionality between the demand for a good and its price. This misunderstanding likely stems from translations of the widely used study guide by C. McConnell and S.

Brue. The second issue is a misinterpretation of the Giffen effect, which mistakenly associates it with the relative cheapening of a good amid rising prices of other goods. This interpretation appears to originate from textbooks employed at Moscow State University.

The article introduces an original model of the Giffen effect, demonstrating that all the conditions outlined by J. Hicks as essential for the effect align with this model, as well as with the results of the 2006 Jensen-Miller field experiment conducted in China. However, the paper suggests that not all of Hicks’ conditions are necessary.

By discarding the assumption of universal substitutability among goods, the application of the Giffen effect can be simplified to focus solely on substitute goods and the corresponding portion of consumer income spent on them. Consequently, Giffen behavior may not be confined to low-income consumers. High-income consumers, due to the broader variety of goods they purchase, may display Giffen behavior as frequently, if not more so, than low-income consumers, especially when low-value goods are present within their consumption groups.