Purchasing-power-dependent Preferences as a New Explanation of Giffen Behaviour: A Note

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Summary This paper develops an example beyond traditional microeconomic theory that provides a new explanation of Giffen behaviour. Maslow’s hierarchy of needs suggests that an individual’s preferences are not fixed but, rather, depend on purchasing power. A decrease in purchasing power with respect to low-hierarchy goods (e.g., bread) is likely to augment an individual’s preferences for such goods and to weaken preferences for high-hierarchy goods (e.g., books). By introducing a simple purchasing-power-dependent utility function that satisfies the standard assumptions, it is shown that the preference-shifting effect can provoke Giffen behaviour.