Now for the tricky one. In the Nineteenth Century, there was some testimony in the British Parliament that suggested an exception to the "Law of Demand." The testimony claimed that in Ireland, potatoes might have an upward-sloping demand curve. The argument started from the fact that the Irish poor people were very dependent on potatoes for basic nutrition. If the price of potatoes were to drop, the poor people would be able to buy their basic nutrition for a smaller part of their income. As a result, they would be able to buy more of other foods -- cheese, milk, eggs and meat, for example -- and as a result they would need less potatoes to survive, and the quantity of potatoes demanded would drop!
The logic of the argument is that potatoes are an "inferior good." We suppose that most Irish people preferred a diet with a variety of meat, cheese, milk, eggs and so on, but they cannot afford it, so they ate potatoes instead, because potatoes were the cheapest food they could get. A drop in the price of potatoes would raise the purchasing power of their income, making them better off -- and being better off, they would consume more of the other goods and less of the inferior good, potatoes.
Some people said that the witness who testified to this in Parliament was Capt. Robert Giffen, so this example has been named after him: a Giffen good. However, later, follow-up studies did not confirm that he was the witness, and it is not known who the witness may have been.
Anyway, we still think of this example as a "Giffen good" example. Does it make sense in terms of indifference curves? Figure 4 shows that it does.
In Figure 4, M is the budget line before the price of potatoes drops. The decrease in the price of potatoes means that a consumer can buy more potatoes with the same income -- so the budget line swings rightward to line N. The highest preference on budget line M is shown by indifference curve I, and that leads the consumer to buy quantity A of potatoes. After the price goes down, the consumer can reach indifference curve II on budget line N. To do that, the consumer buys quantity B of potatoes, less than before even though the price is lower.
(Alert students often notice that these indifference curves look funny and asymmetrical. They do -- and that's why the result is strange -- but there is no rule that says that indifference curves have to be symmetrical!)
Explanation
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