Normal, Giffen and Veblen Goods

This short article's function is to provide an academic definition of the various type of goods a consumer buys and how they are affected by income and substitution effects.

Consumer choice theory is the brand of Microeconomics that associates Consumer Demand to Consumer Preferences

The assumption is that consumers must purchase and consume goods offered at market prices and with a clearly defined maximum income they can spend.

If you think about it, it makes perfect sense. All of us have a certain income and make daily decisions on what to consume: housing, food, recreation, collectibles, etc. If our income goes up or down, and if the price of the goods we need or are interested in goes up or down we will adjust our Consumption Preferences accordingly.

It would be absolutely fantastic if we could consume (purchase) as much of anything whenever we want, however for the vast majority of us, we are constrained by income and prices. Therefore we make decisions yielding the maximum possible utility within our Budget constraints.

Let's now define what we can buy with our income.

1) Normal goods

A normal good is one that sees its demand increase as income increases. Its demand has a Direct Relationship with consumers ability to spend (income). Think electronics. If more people earn more, it is likely that Apple will sell more iPhones.

1) Inferior goods and Giffen goods

An inferior good is one that sees its demand decrease as income increases and vice versa. Think bus transportation. If more people earn more, it is likely that they will buy a car and stop taking the bus to go to work.

Not all inferior goods are Giffen goods however all Giffen goods are inferior goods. These are goods that a consumer buys less of as the price falls and more of when the price rises. These goods defy standard Consumer Demand theory and are extremely rare. One example could be Potatoes during the Irish famine (first iphotesis attributed to Robert Giffen). Bread and Rice also could fall into this category.

1) Veblen goods

A Veblen good is one that sees its demand increase as its price increases. Think limited production luxury cars or fine art. The exclusive nature of these type of goods makes them more desirable as the price increases. One of the characteristics of these goods is their Scarcity.

These goods defy standard Consumer Demand theory which is based on the simple relationship of prices going up and demand coming down until an equilibrium point is reached.

The point I want to make with this article is that in my opinion Bitcoin behaves like a Veblen good

We observe interest in Bitcoin going up as it increases in price and not only for trading/speculation purposes. Given its scarcity, more and more people are holding Bitcoin and have no intention of selling it. It is almost like a piece of fine art. As it increases in value it becomes more desirable.

It is certainly a little unorthodox to compare Bitcoin to a consumer good, however similarities are so evident that they are tough for me to ignore. Never underestimate human psychology, ultimately things have the value we attribute them.

I am fully aware of all the other problems Bitcoin solves and its use cases however by owning Bitcoin, one ultimately owns a piece of something finite which could have incredible value for us humans.