chapter  14
18 Pages

Giffen goods vs market-determined prices

The idea of the Law of Demand was commonly accepted long before Marshall mentioned the Giffen paradox. The Giffen paradox has always been interpreted as a problem for demand theorists.1 They were required to somehow assure us that their theories of consumer behaviour imply the allegedly observed regularity of the absence of Giffen goods-that is, imply the ‘universal rule’ of negatively inclined demand curves. The basis of this requirement is usually viewed as a matter imposed on us by tradition or casual knowledge rather than as a matter of an interaction of demand theory with the other parts of price theory. If the Law of Demand is retained as a matter of tradition it can be callously abandoned. If it is a matter of casual knowledge we might wish to be more careful. But if it is a matter of dealing with the interaction with other parts of price theory, the Law of Demand may actually be an imperative.