Normal GoodsExplained & Defined with Examples
Normal goods are a class of goods that experience a rise in demand whenever consumer income rises.
This means that if wages rise, the economy is to expand, or if other factors cause a person’s income to rise, so will the demand for a normal good.
Conversely, if consumer income declines, such as due to a decrease in wage, the demand for normal goods will decline as well.
Normal goods operate in direct contrast with inferior goods, for which demand declines as consumer income rises.
Normal Goods Explained
Normal goods, also known as necessary goods, are the goods or services which have a direct positive correlation between consumer income and demand.
This correlation is known as an elastic relationship and means that demand and income for a normal good move in the same direction.
This is a common phenomenon that is easily understood for many goods.
For example, if a consumer were to receive an increase in wages, they may be willing to spend more to purchase brand-name goods instead of generic labels.
In this case, the brand name good would be a normal good, and the generic label would be an inferior good.
In order to determine if a given product or service is a normal good, economists calculate the income elasticity of demand for the good.
Income elasticity of demand determines how much the quantity of demand for a good change in response to changes in consumer income.
This value can be positive, negative, or non-responsive for a specific good.
Price elasticity of demand is calculated by dividing the change in the quantity of demanded goods by the change in consumer income.
The formula for this is:
Income Elasticity of Demand = Percentage Change in Demand Quantity / Percentage Change in Consumer Income
Once calculated, normal goods will have a positive value that is less than one.
This means that consumer demand for these goods will follow in the same direction as changes in consumer income.
In contrast, a negative value indicates that the demand will move in an inverse direction with income.
Products with a negative value are referred to as inferior goods, and demand for these goods will fall with an increase in consumer income and vice versa.
Two other situations that can arise are when the income elasticity of demand is greater than one and when it is zero.
In the former case, when the value is greater than one, this indicates that the good has a positive correlation with income that is stronger than with normal goods.
The latter situation, when the income elasticity of demand is zero, indicates that demand for the good is inflexible and will not change regardless of changes in consumer income.
These types of goods are often known as essential goods, and common examples of this are goods such as water and salt, which consumers will need the same amount of regardless of their income.
Businesses will often analyze the price elasticity of demand for their products and services in order to determine how income will impact demand for their goods.
This can help to target marketing efforts, prepare for economic downturns, and to forecast sales based on economic conditions.
Normal Goods Vs. Inferior Goods
Inferior goods are the opposite of normal goods as unlike normal goods, which move in the same direction as changes in consumer income, inferior goods will move in the opposing direction as consumer income rises, the demand for inferior goods drops, and vice versa.
In other words, inferior goods are less desirable to consumers than normal goods, though this does not always correlate to quality, only their desirability, and affordability.
For example, if a consumer’s income were to drop, they may choose to save money by purchasing store-label bread instead of the brand name they regularly purchased when their income was higher.
In this case, the brand-name bread was a normal good, and the store label alternative was an inferior good.
Normal Goods Vs. Luxury Goods
Normal goods and luxury goods both have a positive correlation with income and thus have an income elasticity of demand greater than zero.
However, unlike normal goods, which include values between zero and one, luxury items have a value of more than one, which means an even greater correlation with aggregate income than with normal goods.
As income rises, consumers will generally spend a greater proportion of their income on luxury items, whereas they will generally spend a roughly equal portion of their income on normal goods and less on inferior goods.
However, what is defined as a luxury good or normal good can vary considerably based on factors such as culture, geographic location, socio-economic conditions, and many more factors.
Examples of Normal Goods
Normal goods encompass a wide range of the goods and services in an economy; however, some common examples include:
- Food Choices: Normal goods are easy to see in food options. For example, fast-food restaurants are often an inferior good, whereas eat-in restaurants are often a normal good. Another common example is generic versus brand name food options.
- Clothing: As income increases, consumers are often more willing to spend a greater amount on clothing. This will often mean spending a greater amount on more expensive brands of clothing.
- Transportation methods: Commonly, public transportation methods such as bus tickets are inferior goods that consumers will purchase more of as income falls. Cars, in contrast, are often a normal good that consumers will choose as their income rises. In some cases, such as with sports cars, these may instead be a luxury goods.
- Household Appliances: As consumer incomes increase, many people may choose to upgrade their home appliances to a higher quality or better functioning model. For example, some may choose to purchase a dishwasher that offers a higher capacity or water-saving features.
- Electronics: Many technology items are normal goods, such as many televisions and smartphones. However, some electronics may offer high-end features such as high-definition, large-screen televisions, which could qualify them as a luxury goods. Others, such as low-quality smartphones, may instead be an inferior good.
- Normal goods are goods that experience a rise in demand in response to an increase in consumer income.
- Common examples of normal goods are branded clothing, organic produce, cars, and household appliances.
- Normal goods operate in contrast with inferior goods, which decline in demand with increases in consumer income and increase in demand as consumer income falls.
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MIT "Lecture 5 - Choice, Demand. Normal and Inferior Goods" Page 1 -18. August 29, 2022
University of Notre Dame "I. DEMAND AND SUPPLY ANALYSIS" Page 1 . August 29, 2022