What defines a Giffen good?

The defining characteristic of a Giffen good is that a rise in its price leads to an increase in quantity demanded, making the choice centered around this unique relationship between price and demand. Giffen goods are typically inferior goods, meaning that they are goods which consumers turn to when their income decreases.

When the price of a Giffen good rises, it makes the purchasing power of consumers effectively decrease. If the good is a staple or essential for their diet (for example, bread or rice), consumers may end up buying more of it despite the price increase because they can no longer afford more expensive substitutes. This phenomenon contradicts the typical law of demand where, generally, as price increases, quantity demanded decreases.

In the context of the statements, the other options do not capture this relationship accurately. Luxury items do not represent Giffen behavior, as their demand typically decreases with a price increase. Additionally, the statement regarding falling prices leading to less consumption due to higher real incomes relates more to the concept of normal goods rather than Giffen goods, which are tied more closely to lower-income consumption behavior.