Giffen Good

( Gavin
Ritz 2011.07.18.11.47NZT)

I am trying to find one situation of the Giffen
Effect in all the years I have been in business on my own account. I can’t.

Has anyone got any evidence and data on
the Giffen effect to prove it?

So what is the relevance of this obscure
concept?

And if it is proved what is the meaning of
it.

Regards

Gavin

···

[From Adam Matic 2011.07.18 2223 CET]

Rick Maren (2011.07.18.1120)
It’s unlikely that you would have seen it in your business. The Giffen

effect is expected only when people have a very limited budget; ie.

they are poor.

AM:

In what market conditions? It seems relevant that buyers have only one choice of rice and meat, and only one source of income. What if there are competing producers with different prices?

What if there is inflation, and along with the price of food, wages rise too?

GR: So what is the relevance of this obscure concept?

It shows that price is not a stimulus that “suppresses” demand (as

implied by the “demand curve”); rather, price is a disturbance to

control of the perceptions being controlled for (such as tastiness and

calories in the case of food) by buying stuff.

AM:

That price is not a stimulus is implied in the basics of PCT.

A PCT model of the market would necesarily show the same supply-demand curve as observed in a real market. It’s just that the explanation for it would be different than the standard SR explanation.

Best, Adam

(Gavin Ritz 2011 July 19 17.55NZT)

[Martin Lewitt 2011 July 18 1509 MDT]

[From Rick Maren
(2011.07.18.1120)]

Gavin Ritz (2011.07.18.11.47NZT)

ML: More interesting would be differences PCT might
make in the more common

economic situations.

GR: I agree who cares
about a scenario that just doesn’t exist.

We still can’t agree
on what the environment looks like between two control systems. If we can’t
agree on that then we can’t even begin to understand how an economy would
be modelled using PCT.

I’ve been long
enough in business to know when pricing is a factor and when it’s not. This
Giffen good story just makes no sense to me both practically and theoretically.
It’s a non starter. I’ve spent 20 years building business strategic
models, buying, selling, starting businesses (all types), selling and producing
goods from semiconductors to cosmetics and can’t find one reason why I would
take too much notice of this concept.

Regards

Gavin

···

[From Rick Maren (2011.07.18.1120)]

Gavin Ritz (2011.07.18.11.47NZT)

GR: I am trying to find one situation of the Giffen Effect in all the years I
have been in business on my own account. I can�t.

It's unlikely that you would have seen it in your business. The Giffen
effect is expected only when people have a very limited budget; ie.
they are poor.

GR: Has anyone got any evidence and data on the Giffen effect to prove it?

Yes, I have a paper that describes research where they find evidence
of a Giffen effect. The research was done in two poor rural villages
in China. They found a positive relationship between price and demand
(the reverse of the "demand curve") for a less preferred staple in
the village that was not given a stipend, making them unable to
maintain caloric intake with the more expensive (and tastier) good.
I'll post a link to that paper soon at my demo of the Giffen effect at
http://www.mindreadings.com/ControlDemo/Economics.html.

GR: So what is the relevance of this obscure concept?

It shows that price is not a stimulus that "suppresses" demand (as
implied by the "demand curve"); rather, price is a disturbance to
control of the perceptions being controlled for (such as tastiness and
calories in the case of food) by buying stuff.

GR: And if it is proved what is the meaning of it.

See above.

Best

Rick

···

--
Richard S. Marken PhD
rsmarken@gmail.com
www.mindreadings.com

[Martin Lewitt 2011 July 18 1509 MDT]

[From Rick Maren (2011.07.18.1120)]

Gavin Ritz (2011.07.18.11.47NZT)

GR: I am trying to find one situation of the Giffen Effect in all the years I
have been in business on my own account. I can�t.

It's unlikely that you would have seen it in your business. The Giffen
effect is expected only when people have a very limited budget; ie.
they are poor.

It is theorectically possible when people have a very limited budget but not an extremely limited budget, because these poor would have to be able to afford a preferred more expensive substitute. Consider the Giffen effect in reverse. Poor people using all their funds for a unpalatable but affordable life sustaining food. Then that food drops in price, perhaps due to a good harvest. They can now afford to forgo some of that lower priced food and purchase a more palatable but more expensive item instead. I wonder if some of this happened in the third world in response to the price increases due to America's ethanol mandate.

GR: Has anyone got any evidence and data on the Giffen effect to prove it?

Yes, I have a paper that describes research where they find evidence
of a Giffen effect. The research was done in two poor rural villages
in China. They found a positive relationship between price and demand
(the reverse of the "demand curve") for a less preferred staple in
the village that was not given a stipend, making them unable to
maintain caloric intake with the more expensive (and tastier) good.
I'll post a link to that paper soon at my demo of the Giffen effect at
http://www.mindreadings.com/ControlDemo/Economics.html.

GR: So what is the relevance of this obscure concept?

It shows that price is not a stimulus that "suppresses" demand (as
implied by the "demand curve"); rather, price is a disturbance to
control of the perceptions being controlled for (such as tastiness and
calories in the case of food) by buying stuff.

That is an interpretation of one price in isolation, price is still suppressing the demand for the preferred product. I suspect the Giffen effect would be more likely be seen, for groups of commodities. There are just too many substitutes available, but groups of commodities can often change price in unison, as even non-corn grains, and corn fed animal meats did in response to the ethanol subsidies. I suspect many poor would have to consume more grains and root vegatables and less meats due to increased grain prices, even if meat prices remained stable. Although perhaps they could maintain the meat consumption by shifting to less palatable staples.

GR: And if it is proved what is the meaning of it.

See above.

More interesting would be differences PCT might make in the more common economic situations.

-- Martin L

···

On 7/18/2011 12:24 PM, Richard Marken wrote:

Best

Rick

[From Rick Marken (2011.07.18.1810)]

Adam Matic (2011.07.18 2223 CET)

AM: That price is not a stimulus is implied in the basics of PCT.

You betcha!

AM: A PCT model of the market would necesarily show the same supply-demand curve as observed in a real market.

We are talking about price-demand not supply -demand curves.

The price-demand curve is theoretical and this theoretical curve (increased price associated with decreased demand) is not necessarily observed in a real market (for example, in the case of the Giffen phenomenon, http://www.mindreadings.com/ControlDemo/GiffenEffect.pdf).

It’s just that the explanation for it would be different than the standard SR explanation.

The wishful cry of all economists who get into PCT;-)

Best

Rick

···


Richard S. Marken PhD
rsmarken@gmail.com
www.mindreadings.com

[From Rick Marken (2011.07.18.1815)]

Martin Lewitt (2011 July 18 1509 MDT)–

GR: So what is the relevance of this obscure concept?
RM:It shows that price is not a stimulus that “suppresses” demand (as

implied by the “demand curve”); rather, price is a disturbance to

control of the perceptions being controlled for (such as tastiness and

calories in the case of food) by buying stuff.

M: That is an interpretation of one price in isolation, price is still suppressing the demand for the preferred product.

Not at all; people are still free to buy less of the product that is going up in price. They will just starve to death if they do. Ah, freedom!

Best

Rick

···

I suspect the Giffen effect would be more likely be seen, for groups of commodities. There are just too many substitutes available, but groups of commodities can often change price in unison, as even non-corn grains, and corn fed animal meats did in response to the ethanol subsidies. I suspect many poor would have to consume more grains and root vegatables and less meats due to increased grain prices, even if meat prices remained stable. Although perhaps they could maintain the meat consumption by shifting to less palatable staples.

GR: And if it is proved what is the meaning of it.
See above.

More interesting would be differences PCT might make in the more common economic situations.

– Martin L

Best

Rick


Richard S. Marken PhD
rsmarken@gmail.com
www.mindreadings.com

[From Bill Powers (2011.07.18.1625 MDT)]

Adam Matic 2011.07.18 2223 CET]

Rick Maren (2011.07.18.1120)
It’s unlikely that you would have seen it in your business. The
Giffen
effect is expected only when people have a very limited budget; ie.
they are poor.AM:

In what market conditions? It seems relevant that buyers have only one
choice of rice and meat, and only one source of income. What if there are
competing producers with different prices?

The requirements for the Giffen Effect to occur are not complicated, and
as you indicate they can appear under many conditions.

The first condition is that the person is operating in such a way that
expenditures are close to the amount of income. You could split this into
budgets for this and budgets for that and look for Giffen Effects in each
budget area. There can also be Giffen effects arising from the existence
of two or more budget areas with a limit on total budget.

The second condition is that each good can satisfy more than one
requirement; a specific make of car, for example, can supply desired
transportation, and also can affect one’s prestige in the community one
wishes to impress, one’s safety in traffic, expenditures on gasoline, the
size of garage one needs to house it, and the cost of insurance,
registration, and repairs.

The third condition is that the importance given to goods is not
systematically related to the prices of the goods.

If the more important good is also the most expensive, and this
relationship holds from most to least important, the traditional law of
supply and demand will hold, and so will the interchangeability of goods.
That’s my instinctive guess; I haven’t worked this out in
detail.

However, if the most important good costs less than a more expensive good
that will satisfy the same requirement, but doesn’t supply something
desirable that the more expensive good does supply, the law of supply and
demand will work backward for the most important good. A rise in price of
the lower-priced good will cause a shift to buying more of it, and less
of more expensive goods,

Martin Lewitt (2011 July 18 1509 MDT) notes that the Giffen Effect also
works in the other direction: “Poor people using all their funds for
a unpalatable but affordable life sustaining food. Then that food drops
in price, perhaps due to a good harvest. They can now afford to forgo
some of that lower priced food and purchase a more palatable but more
expensive item instead.”

Nicely worked out.

This exercise is a first step toward a full analysis of the supply-demand
relationship. There are actually many goods, each of which can affect
more than one controlled variable, and each control system will act by
buying various amounts of all goods that affect its controlled variable.
To minimize total error in the collection of control systems, a
simultaneous equation must be solved, the solution specifying how much of
each good must be purchased at its current price. There will be no simple
relationship between price and amount purchased for any one good, or
between price changes and changes in the amount purchased – expecially
if we set up a model with many actors in it having a variety of
preferences.

Bill Williams’ model, having only one actor, two goods, and two
controlled variables, shows the possibility of the Giffen Effect. But the
Giffen Effect is only a very simple example of a much more complex
situation.

Fortunately, a control system model with many controllers, many inputs to
the controlled variable, and many outputs each affecting some or all of
the controlled variables, can solve these simultaneously equations
automatically.

I have resurrected an old Delphi program that I demoed in Los Angeles –
I think in 2002. This program can handle up to 500 control systems
each controlling a different controlled variable. The controlled
variables are perceptions generated by sensing different weighted sums of
500 environmental variables, and the output of each control system
affects, via another set of weights, the same 500 environmental
variables. The environmental variables can be the goods, and the
perceptions can be the controlled variable affected to varying degrees
(shown by the input weights) by each good. The output weights are
adjusted for stable control, which is done simply by making each control
system have an integrating output function, and making the matrix of
output weights be the transpose of the input weight matrix (demonstrating
that was the point of this demo). We could add a random array of prices
for the 500 goods, and another array of “importances” (gains)
for the control systems.

Note that this model does NOT assume that the controlled variables are
the quantities of the goods (or services). They are effects of obtaining
those goods and services, the effects being the real reasons for buying
anything. To be sure, one has a goal of obtaining food, and in order to
obtain it one trades money or work for it. But that’s not the end; the
reason for obtaining food is to fend off or reduce hunger or give it to
someone or enjoy the taste or feel proud of one’s status or any or all of
a number of other consequences of obtaining the food.

There are many ways to branch out from this model, but I think it will
provide a starting point for systematic development. And it will show
clearly that there is no simple law of supply and demand, and no simple
rule for deciding how much of one good provides as much benefit as one
unit of another good.

Best,

Bill P.

···

[From Adam Matic 2011.07.20 1200 CET]

Bill Powers (2011.07.18.1625 MDT)

I have resurrected an old Delphi program that I demoed in Los Angeles –
I think in 2002. This program can handle up to 500 control systems
each controlling a different controlled variable. The controlled
variables are perceptions generated by sensing different weighted sums of
500 environmental variables, and the output of each control system
affects, via another set of weights, the same 500 environmental
variables. The environmental variables can be the goods, and the
perceptions can be the controlled variable affected to varying degrees
(shown by the input weights) by each good. The output weights are
adjusted for stable control, which is done simply by making each control
system have an integrating output function, and making the matrix of
output weights be the transpose of the input weight matrix (demonstrating
that was the point of this demo). We could add a random array of prices
for the 500 goods, and another array of “importances” (gains)
for the control systems.

Note that this model does NOT assume that the controlled variables are
the quantities of the goods (or services). They are effects of obtaining
those goods and services, the effects being the real reasons for buying
anything. To be sure, one has a goal of obtaining food, and in order to
obtain it one trades money or work for it. But that’s not the end; the
reason for obtaining food is to fend off or reduce hunger or give it to
someone or enjoy the taste or feel proud of one’s status or any or all of
a number of other consequences of obtaining the food.

There are many ways to branch out from this model, but I think it will
provide a starting point for systematic development. And it will show
clearly that there is no simple law of supply and demand, and no simple
rule for deciding how much of one good provides as much benefit as one
unit of another good.

AM:

Wow.

Any chance of sending the code and presentation papers? I’d love to see how it works.

Best

Adam

(Gavin Ritz
2011.07.20.23.04NZT)

[From Adam
Matic 2011.07.20 1200 CET]

Bill Powers
(2011.07.18.1625 MDT)

I have resurrected an old
Delphi program that I demoed in Los Angeles – I think in
2002. This program can handle up to 500 control systems each controlling
a different controlled variable. The controlled variables are perceptions
generated by sensing different weighted sums of 500 environmental variables,
and the output of each control system affects, via another set of weights, the
same 500 environmental variables. The environmental variables can be the goods,
and the perceptions can be the controlled variable affected to varying degrees
(shown by the input weights) by each good. The output weights are adjusted for
stable control, which is done simply by making each control system have an
integrating output function, and making the matrix of output weights be the
transpose of the input weight matrix (demonstrating that was the point of this
demo). We could add a random array of prices for the 500 goods, and another
array of “importances” (gains) for the control systems.

Note that this model does NOT assume that the controlled variables are the
quantities of the goods (or services). They are effects of obtaining those
goods and services, the effects being the real reasons for buying anything. To
be sure, one has a goal of obtaining food, and in order to obtain it one trades
money or work for it. But that’s not the end; the reason for obtaining food is
to fend off or reduce hunger or give it to someone or enjoy the taste or feel
proud of one’s status or any or all of a number of other consequences of
obtaining the food.

There are many ways to branch out from this model, but I think it will provide
a starting point for systematic development. And it will show clearly that
there is no simple law of supply and demand, and no simple rule for deciding
how much of one good provides as much benefit as one unit of another good.

This sounds interesting.

Regards

Gavin

AM:

Wow.

Any chance of sending the
code and presentation papers? I’d love to see how it works.

Best

Adam

[From Bill Powers (2011.07.20.0555 MDT)]

Adam Matic 2011.07.20 1200 CET --

Any chance of sending the code and presentation papers? I'd love to
see how it works.

See zipped attachment. It unzips to a "program" folder and in that is
the source code as well as the executable. Also included is
"multisys.exe" which plots from 1 to 25 control systems showing the
relationships of the N systems to the N environmental variables. Also
included, the writeup distributed at the conference (which I see was
in 2003, not 2002).

Best,

Bill P.

Multicontrol.zip (487 KB)