Normal goods are consumer products such as food and clothing that exhibit a direct relationship between demand and income. As a consumer’s income rises, the demand for normal goods also increases.
Key Takeaways
- A normal good is a good that experiences an increase in demand due to an increase in a consumer’s income.
- Normal goods have a positive correlation between income and demand.
- Examples of normal goods include food, clothing, and household appliances.
Grasping the Concept of Normal Goods
A normal good, or necessary good, doesn’t refer to the quality of the good but rather, the level of demand for the good and its relationship to the increases or decreases of a consumer’s income level.
Demand for normal goods is determined by patterns of consumer behavior and, as income levels rise, consumers can often afford goods that were not previously available to them. Examples of normal goods include:
- Food
- Clothing
- Entertainment
- Transportation
- Electronics
- Home Appliances
Income Elasticity of Demand: Measuring Impact
Normal goods have a positive income elasticity of demand, where changes in demand and changes in income move in the same direction.
Income elasticity of demand measures the magnitude with which the quantity demanded changes in reaction to a change in income. It is utilized to understand changes in consumption patterns that result from changing purchasing power.
Income elasticity = % change in quantity purchased / % change in income
A normal good has an income elasticity of demand that is positive but less than one. For example:
If the demand for blueberries increases by 11 percent when income increases by 33 percent, then blueberries have an income elasticity of demand of 0.33, or (11/33). Blueberries qualify as a normal good.
Economists use income elasticity of demand to determine whether a good is a necessity or a luxury item. Companies also analyze the income elasticity of demand for their products and services to help forecast sales in times of economic expansion or downturns.
Normal Goods vs. Inferior Goods
Inferior goods are the opposite of normal goods. Inferior goods are goods whose demand drops as consumers’ incomes rise. As an economy improves and wages rise, consumers will prefer more costly alternatives to inferior goods. The term “inferior” doesn’t refer to quality but to affordability.
Public transportation typically has an income elasticity of demand coefficient that is less than zero, indicating its demand falls as income rises, classifying it as an inferior good. Most people prefer to drive a car if given a choice and can afford it.
Inferior goods include all goods and services that people purchase only because they cannot afford higher-quality substitutes.
Normal Goods vs. Luxury Goods
Luxury goods generally have an income elasticity of demand that is greater than one and include items like expensive cars, vacations, fine dining, and gym memberships.
Consumers tend to spend a greater proportion of their income on luxury goods as their income rises, whereas people spend an equal or lesser proportion of their income on normal and inferior goods as their income increases.
Example of a Normal Good
Consider Jack who earns $3,000 per month and spends 40% of his income on food and clothing, or $1,200. If his income rises to $3,500 per month, marking a 16% increase, Jack can afford more. He may increase his purchases for food and clothing to $1,320 per month, a 10% increase.
Food and clothing are considered normal goods for Jack because he increased his purchases by 10% with a 16% raise. His income elasticity of demand is .625 (10/16). With an elasticity of demand of less than one, these goods qualify as normal goods.
Normal Goods During a Recession
Most products, or normal goods, will experience a decrease in demand during a recession since economic contraction results in reduced consumer income, leading to fewer purchases.
What Differentiates Normal Goods from Inferior and Luxury Goods?
Goods may be classified differently—normal, inferior, or luxury—depending on the region or country where they are demanded or sold.
The Income Effect
The income effect is the change in demand for a good or service caused by an increase or decrease in a consumer’s income or purchasing power. As income rises, the income effect assumes that people will begin to demand more goods, such as normal goods.
The Bottom Line
Normal goods, including food, clothing, and household appliances, exhibit increased demand as income rises. The income elasticity of demand formula measures how demand changes in response to changes in income.
Related Terms: Income Elasticity of Demand, Inferior Goods, Luxury Goods, Recession, Income Effect.
