Giffen Curves and Cider

Why demand sometimes rises when the price goes up

Giffen Curves Without Tears

If you’re not an economist, don’t worry. The chart basically contains a set of curves showing the demand functions for two hypothetical goods, which is, I admit, less than thrilling, unless you know something about Giffen goods.

Giffen was an economist who noticed that, as the scarcity of potatoes and their price increased during the Irish Potato Famine of 1845, so the Irish spent more on potatoes and less on meat, grains, eggs, vegetables and so on. Potatoes were the staple part of their diet, which meant that, very quickly, the Irish were spending all their money on mouldy potatoes.

Yesterday, Alastair Darling revealed his final budget proposals before the General Election in six weeks’ time. There didn’t seem to be much in it except a substantial hike in tax on cider.

The reason for the hike is that health activists, especially in Scotland, and in Glasgow particularly, think that raising the price of cheap alcohol will dampen binge drinking.

Hmm. Maybe.

Young binge drinkers probably have alternative options to alcohol providing they are not addicted to the stuff. There are plenty of other fairly cheap, though illegal substances, which they can swallow, smoke or inject before going out on a Friday night. They are not necessarily dependant on cheap hooch.

For older drinkers though, especially those who are on income support or out of work, and who are alcoholics, the situation is going to be made much tougher by the increase in tax on cider of 10% above inflation, announced by the UK’s Chancellor of The Exchequer in yesterday’s Budget.

Why? Because, if the price of cider goes up, alcoholics will have less to spend on healthier things like muesli, probiotic yoghurt and skinny lattes.

The effect will be that these older drinkers will actually spend more, not less, on cider.

And that would make cider a Giffen good, which is certainly not what Mr Darling would have had in mind.

If you want to know more about Giffen goods and curves have a look at this on YouTube.