What is a Normal Good
A normal good is one whose demand increases as people's incomes or the economy rise. A normal good is defined as having an income elasticity of demand coefficient that is positive, but less than one.
BREAKING DOWN Normal Good
A normal good, also called a necessary good, is the opposite of an inferior good. A luxury good is also a normal good, but a normal good isn't necessarily a luxury good. A luxury good means a greater increase in income results in a larger percentage increase in demand.
A normal good has an income elasticity of demand that is positive, but less than one. Income elasticity of demand measures the magnitude with which the quantity demanded of a good changes in reaction to a change in income. It is used to understand changes in consumption patterns that result from changes in purchasing power. If the demand for blueberries increases by 11 percent when aggregate income increases by 33 percent, then blueberries are said to have an income elasticity of demand of 0.33, qualifying blueberries as a normal good. Other examples of normal goods include food staples, clothing and household appliances.
Examples of Normal Goods
As we mentioned above, normal goods are ones whose demand rises when incomes or the economy grow. If you have a lower income, then you’ll probably buy a lower quality or cheap brand of good. But if your income rises, you’re probably going to buy a higher quality, more expensive version of that same good.
Some examples of normal goods include organic foods. Consider what we mentioned above in relation to organic bread. If your income is fairly low, you’ll probably buy a cheaper bread that is of low quality. But you may start to buy organic bread if your income starts to rise. Other types of normal goods include clothing, household appliances, furniture, jewelry, sports and luxury cars, televisions, water, and alcohol. All of these goods tend to have an income elasticity of demand of less than one.
Inferior Goods and Luxury Goods
Public transportation tends to have an income elasticity of demand coefficient that is less than zero, meaning that its demand falls as income rises, classifying public transport as an inferior good. This reveals a generalization in human behavior; most people would prefer to drive a car if given the choice. Inferior goods include all the goods and services that people purchase only because they can't afford these goods' higher-quality substitutes, as well as some goods that can be viewed as alleviating the stresses of poverty, such as cigarettes.
Luxury goods, on the other hand, have an income elasticity of demand that is greater than one. If the demand for sports cars increases by 25 percent when aggregate income increases by 20 percent, then sports cars are considered luxury goods because they have an income elasticity of demand of 1.25. Other luxury goods include vacations, consumer durables, fine dining and gym memberships. In 2015, the United States remained the largest market in the world for luxury goods, although growth slowed due to a stronger dollar that reduced foreign tourism to the country.
People 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. People with lower incomes spend a greater proportion of their income on normal and inferior goods than people with higher incomes, on average. On an individual level, a particular good can be a normal good to one person but an inferior or luxury good to another.