What Are Normal Goods?
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.
- 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.
Understanding 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:
- Home Appliances
Income Elasticity of Demand
Normal goods have a positive income elasticity of demand, where a change in demand and a change 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 used to understand changes in consumption patterns that result from changes in purchasing power.
Income elasticity=%change in income%change in quantity purchased
A normal good has an income elasticity of demand that is positive, but less than one.
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 the 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 expansions resulting in rising incomes, or during economic downturns and declining consumer incomes.
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 a more costly alternative to inferior goods. The term "inferior" doesn't refer to the quality but affordability.
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. Most people prefer to drive a car if given a choice and can afford it.
Inferior goods include all of the goods and services that people purchase only because they cannot afford higher-quality substitutes.
Normal Goods vs. Luxury Goods
Luxury goods commonly 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
Jack earns $3,000 per month and spends 40% of his income on food and clothing or $1,200 per month. If his income rises to $3,500 per month for a 16% increase in income, Jack can afford more, so he may increase his purchases or demand for food and clothing to $1,320 per month for a 10% increase or ($1,320 - $1,200) / $1,200) x 100.
Food and clothing are considered normal goods for Jack because he increased his purchases by 10% when he realized a 16% raise. His income elasticity of demand is .625 or (10/16). Since food and clothing have an income elasticity of demand of less than one, Jack's food and clothing are normal goods.
How Are Normal Goods Affected During a Recession?
Most products, or normal goods, will experience a decrease in demand during a recession since periods of economic contraction reduce consumer income and they buy fewer goods.
What Influences Normal Goods From Inferior Goods and Luxury Goods?
Goods may be classified as normal, inferior, or luxury depending on the region or country where the item is demanded or sold.
What Is the Income Effect?
The income effect is the resulting 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 are products such as food, clothing, and household appliances. Demand for normal goods increase as income rises. The income elasticity of demand formula measures the change in demand to a change in income.