Reflections

We have seen that a Giffen good is possible in terms of preference theory. And some ingenious experiments with rats in cages have verified that their "quantity demanded" for water could drop when the (effort) price they have to pay to get the water drops. But we have no evidence for the existence of Giffen goods in real human economies.

That sounds pretty impractical. But the real point is to test the preference theory approach -- can it deal with hard problems, even if they are impractical? It can. In the process, we get some concepts that do have practical applications. For example, the compensating income variation that corresponds to a price change and the income just large enough to leave the consumer no better off after the price drop both have important applications in advanced, applied economics. What we have seen is that the preference approach is very helpful in understanding the relations between individual prices and the purchasing power of money -- and those relations are very important in many practical ways.

Concluding Chapter Summary