Normal Goods

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Normal Goods Definition

Normal goods refer to a class of goods whose market demand is positively correlated to consumer income. Spending pattern of a consumer changes with an increase or decrease in income. When income increases, they spend more on non-essential goods and vice versa.

When income increases, the dependence on inferior products decreases, and the products under the normal category increase. For instance, the low-income sector of a nation's population commonly uses public transport facilities like buses or metros. When their income increases, they will reach a stage where they can afford private vehicles like cars.

Normal Goods Definition

Normal goods in economics are the goods that consumers demand more when their income rises, and the same demand fall-off when their income is declining.
Its income elasticity is greater than zero.
Examples include branded apparel, organic food, houses, electronics, and luxury cars. Usually, most necessary goods and luxury goods align with this concept.
Inferior goods are just the opposite of this concept. Its demand increases with a decrease in income and decreases with an increase in income.

Normal Goods Explained

Normal goods are primarily consumer goods. Therefore, an increase in its demand indicates the rise in purchasing power of the consumer. Insight into it, business cycles, and consumer spending patterns help businesses understand the target market, identify opportunities and devise strategies accordingly. Ultimately, it allows businesses to grow and increase market share.

A normal good from the context of a low-income earner may be different from the context of a medium or high-income earner. For example, if a low-income earner starts to get adequate income, he may spend more on nutritious food or clothing at the initial phase. At the same time, the scenario can be different for a medium-income earner when he experiences a rise in income; he may plan to buy a house or a luxury car at first. Furthermore, a high-income earner may also go for Veblen goods to signal the social status.

The above graph depicts the shift in demand due to increased income. According to the law of demand, assume the scenario when price increases and quantity demanded decreases, represented by line D₁. Then, when the income increases demand curve shifts to D₂ from D₁, the amount required will be higher than the previous income level demands at any price point.

There are different classifications of goods in economics like luxury goods, necessary goods, and inferior goods. Necessary and luxury items often come under the category of normal. The income elasticity of demand for products falling under the normal category is greater than zero. The value is greater than zero and less than one for necessary goods, and for luxury goods, it is greater than one. Demand for inferior goods is inversely related to income, and the income elasticity of demand is negative; that is, it falls below zero. Let's look into the difference between normal and inferior products.

Normal goods vs Inferior Goods

Normal Goods	Inferior Goods
Demand increase with the increase in income	Demand increase with a decrease in income
Economical or expensive	Low-priced or affordable goods
Preferred during economic prosperity	Preferred during recession times
Food staples and clothing	Public bus services, Giffen goods

Practical Examples

Examples of normal goods are not consistent around the globe. One good can seem normal in one country but inferior in another. However, in most countries, branded apparel, organic foods, luxury cars, and houses demands move with income.

It is not uncommon to have the demand for chocolates increase with income like food staples. Let us consider the following example portraying the income elasticity of demand for chocolates. Mr. A had inadequate discretionary income after settling taxes and different essential needs. However, he got promoted in the current financial year and earned a salary hike. Now he has substantial discretionary income and increased his spending on chocolates and beverages.

If the salary increased by 15%, spending on chocolates increased by 2%. Then the income elasticity of demand is the percentage change in demand divided by percentage change in income, and the result in quantitative value is 0.133. Therefore, the value lies between zero and one. Indicating the fact that it falls into the normal category.

Another example is clothes. When income increases, people spend more on clothes. The purchase quantity might increase, or they buy more branded clothes. When income decreases, people may stop buying branded clothes or reduce their purchase quantity by sticking to the needs and limiting the wants.

Is Water Normal Good?

Water is an example of an essential good. Water demand is less sensitive to income changes, and the income elasticity of demand remains very close to zero. Therefore, the income elasticity of water demand is less than one.

Human beings need water for survival. Imagine an individual drinking 3 liters of water every day. Even after increasing his income, he still drinks 3 liters of water every day. Water consumption is not related to income level. An increase or decrease in income does not affect the demand for drinking water. However, there is increased demand for expensive bottled water brands as income increases.

Is Sugar Normal Good?

In economics, sugar is treated as a necessary good, not an essential good. As a result, it will be less sensitive to income changes than showing a zero-income elasticity of demand. To a great extent, high-income consumers and low-income consumers will use the salt in a similar manner.

Frequently Asked Questions (FAQs)

What is a normal and inferior good?

Market demand for the products falling under normal classification increases when the consumer income increases in the economy and vice versa. Inferior goods exemplify a category of products whose market demand decreases with increased consumer income and vice versa.

How do you determine a normal good?

One method of determining is the use of income elasticity of demand. It is derived by dividing percent change in quantity demanded by percent change in income. The income elasticity of demand for products falling under the normal category is positive. For necessary goods, income elasticity is greater than zero and less than one, whereas, for luxury goods, it is greater than one.

What is normal goods and inferior goods example?

Products under the normal category include branded apparel, organic foods, electronics, houses, and luxury cars. Examples of inferior goods include inexpensive canned foods and used vehicles.