What are normal goods? Definition and meaning
Normal goods, also known as necessary goods, are products for which demand goes up when income rises – however, demand increases at a slower rate than the rate of income growth. Normal goods contrast with inferior goods, for which demand declines as people become richer.
Economists say that a normal good is a product for which *income elasticity-of-demand coefficient is positive – greater than zero – but always less than one.
* Income elasticity-of-demand coefficient measures how responsive demand is for a product or service to a change in the income of consumers demanding that good or service.
Income elasticity-of-demand coefficient
Greater than zero and less than 1
Less than zero (negative)
More than 1
When our incomes are very low, we buy the cheapest products in supermarkets – inferior goods. As incomes rise, demand for inferior goods declines, but increases for normal goods.
If demand for strawberries rises by 11% when there is aggregate income growth of 33%, strawberries have an income elasticity-to-demand coefficient of 0.33, which is greater than 0 but less than one – making it a normal good.
Although the term specifies ‘goods’, it also applies to services – it includes services for which demand grows when incomes rise.
According to BusinessDictionary.com, a normal good by definition is:
“Good for which demand (consumption) increases as consumer income rises, but at a rate slower than the rate of increase in income. Defined also as a good for which the income elasticity of demand is positive but less than one. Also called necessary good, it is the opposite of inferior good.”
When expenditure moves upmarket
When most of us have more money in our pockets, our spending patterns change slightly. We tend to spend less on cheaper versions of a product, such as buying supermarket-brand trainers, and opt for Adidas or Nike versions.
Demand for luxury goods is more sensitive than normal goods to changes in people’s incomes. The income elasticity-of-demand coefficient for luxury goods is greater than one, while for normal goods it is more than zero but less than one.
When a person’s disposable income (spare cash) increases, his or her expenditure on supermarket brands or generic products – inferior goods – decreases, while spending on nicer brands – normal goods – grows.
Spending on supermarket-brand canned soup – inferior goods – is higher when our income is low. As soon as our earnings rise to a certain level, we switch to fresh vegetables and other slightly more expensive foods and household items.
Luxury, inferior, Giffen and normal goods
– Inferior Goods: public transport’s income elasticity-of-demand coefficient is less than zero – demand for public transport declines as our incomes rise. Most of us, as soon as we can afford it, travel in our own cars and avoid sharing vehicles with strangers. Western Europe and Japan may be an exception, because trains there travel considerably faster than cars, thus always offering superior inter-city journey times.
Inferior goods are all those products and services that consumers buy because the upmarket substitutes or alternatives are not affordable.
– Luxury Goods: are high-end or upmarket products for which demand rises at a faster rate than increases in aggregate income. If people’s incomes grow by 20%, demand for luxury cruises increase by 25%, which gives us an income elasticity-of-demand of 1.25.
Luxury goods are any products that have an income elasticity-of-demand of more than one, such as sports cars, posh jewelry, meals at fancy restaurants, first-class air travel, etc. They are also known as Veblen goods.
– Giffen Goods: are products for which demand rises when their prices go up, thus reversing the typical economic law of prices and demand. Giffen goods are inferior products – very basic goods – which low-income households depend on. In Victorian England, for example, when the price of bread went up, poor people would continue purchasing bread, and would probably have to give up consuming more expensive foods like meat – so they’d end up purchasing even more bread.
Your normal goods are my luxury goods – Examples
One person’s ‘normal good’ might be another’s ‘luxury good’. Imagine two families:
– John the bus driver and the Mary full-time homemaker. Household income: $30,000 per year. They have three children, aged 4, 6, and 8.
– Peter the brain surgeon and Georgina the cosmetic dentist. Household income: $300,000 to $400,000 per year. They also have three children, the same ages as John and Mary’s kids.
For Peter and Georgina, having a car each is essential – for them that is a basic requirement. They also want at least one vacation abroad per year – and usually aim for two or three, if their free times coincide with those of their children’s.
John and Mary use public transport all the time – they don’t have a car. For them just one car is a luxury – having two would be a pipe dream. Having a vacation away from home, even if it was just 50 miles away, would be a luxury for them.