Beer: Actually not a Giffen good

One of the great things about being a professor on twitter is that you have a built-in following. A few professors I know even require that their students follow them as part of their grade (in a social media sociology class, but details, shemtails, right?). I don’t force students to follow me, but I do invite them to, and I promise I will not read their tweets unless they ask me to follow them back. This is better for all involved, I promise.

Occasionally, though, students send me really interesting and novel pieces of news or goings on that relate to economics, and that’s where the joy of twitterteaching, yeah, I just made up a new word, comes in. Last night, a former student sent me an article on Oktoberfest beer, which claimed that Oktoberfest beer is a great example of the Giffen paradox because as the price went up, so too did sales, per capita!

If this immediately puts up red flags for you, you’re right to be thinking it sounds a little bit fishy. It is.

The law of demand states that as price rises, quantity demanded decreases. A Giffen good is a good for which price increases translate to increased consumption, hence the paradox, but the part the article is missing is that all else must remain equal. The only thing that can change is the price.

The example I use in class comes from my principles of microeoconomics professor, Thomas Nechyba. Imagine a family living on the Upper Peninsula in Michigan who heats their house with coal and spends two months in Florida each year during the winter. Now imagine that the price of coal rises so much that the family can no longer afford to go to Florida for the winter. In turn, they spend more time in Michigan, and actually use more coal because they need to heat their house during months in which they otherwise wouldn’t have heated their house. The price of the good is the only thing that changed, and it caused them to buy more of it.

Paul Krugman‘s Microeconomics textbook (written with Robin Wells) uses the example of potatoes during the Great Famine in Ireland. As a result of the potato blight, potatoes–a staple food for many Irish, but particularly the poorest–became increasingly expensive. In fact, they became so expensive that the poor couldn’t afford to buy other vegetables and meat, so they actually bought more potatoes. Again, a price rise translates to increased consumption.

By now, it should be clear that Oktoberfest beer doesn’t fit in with these goods. In these examples, the Giffen good is an inferior good (meaning we buy less of it as we get richer) and commands a large share of the budget. It’s also probably a little weird that I the only example I use was given to me over ten years ago when I was a student. The reason is that there just aren’t that many Giffen goods in the real world.

There are plenty of goods that we consume more of, on a macro level, as the price rises: Luxury goods, conspicuous consumption goods, goods for which advertising budgets increase substantially, goods that gain popularity through use by a celebrity, goods that start at introductory low pricing and creep up as they gain notoriety. None of these is a Giffen good, necessarily, and all probably still follow the law of demand, but notice that other things changed besides the price. There are few goods individuals consume more of as the price rises, and even fewer for which nothing changes but the price and we consume more.

The article demonstrates a fallacy of economic logic as it’s often applied by journalists, pundits, and politicians. This is a rather benign example of why I say that a little economics is a dangerous thing. In order for Oktoberfest beer to be a Giffen good, nothing else would have been able to change. Not the number of people attending Oktoberfest, not the composition of people attending Oktoberfest, not the price or availability of substitutes or complements, not advertising or popularity around the event, nothing. Those simply aren’t realistic assumptions normally, but particularly not when we aggregate up individual decisions to a big, world-renowned event.

So, I say not a Giffen good. What do you think?

(As a side note, I realize this space has been lightly used of late. Thanks for continuing to read.)


2 thoughts on “Beer: Actually not a Giffen good

  1. I don’t have data to back it up, but what about something like wine? Often times more expensive bottles are perceived to be of higher quality and a higher price could communicate higher desirability thereby increasing demand.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s