Normal Goods

Definition

Normal goods are a type of consumer good where demand increases as income rises. As a person's disposable income increases, they tend to purchase more of these goods, reflecting a positive relationship between income and demand.

5 Must Know Facts For Your Next Test

1. The demand curve for normal goods slopes upward, indicating a positive relationship between price and quantity demanded.
2. Normal goods typically include essential items like food, clothing, and housing, as well as discretionary purchases like entertainment and travel.
3. The income elasticity of demand for normal goods is positive, meaning that as income increases, the quantity demanded of these goods also increases.
4. Luxury goods are a subset of normal goods where the income elasticity of demand is greater than one, indicating a more than proportional increase in demand as income rises.
5. Engel's Law suggests that as incomes rise, the proportion of income spent on necessities like food decreases, while the proportion spent on discretionary items increases.

Review Questions

• Explain the relationship between income and demand for normal goods.
  • The demand for normal goods has a positive relationship with income. As a person's disposable income increases, they tend to purchase more of these goods, reflecting a higher quantity demanded. This is because normal goods are not considered necessities, and consumers are willing to buy more of them as their income rises. The demand curve for normal goods slopes upward, indicating that quantity demanded increases as price decreases, all else being equal.
• Describe how Engel's Law relates to the consumption of normal goods.
  • Engel's Law states that as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises. This principle can be extended to normal goods more broadly. As a person's income increases, the proportion of their budget spent on essential, normal goods like food, clothing, and housing decreases, while the proportion spent on discretionary, normal goods like entertainment and travel increases. This shift in consumption patterns reflects the changing priorities and preferences of consumers as their incomes rise.
• Analyze the differences between normal goods, inferior goods, and luxury goods, and explain how they are classified based on the income elasticity of demand.
  • The key distinction between normal goods, inferior goods, and luxury goods lies in their income elasticity of demand. Normal goods have a positive income elasticity of demand, meaning that as income rises, the quantity demanded of these goods also increases. Inferior goods have a negative income elasticity of demand, where the quantity demanded decreases as income rises. Luxury goods, a subset of normal goods, have an income elasticity of demand greater than one, indicating that the increase in quantity demanded is more than proportional to the increase in income. This classification based on income elasticity of demand reflects the varying consumption patterns and preferences of consumers as their incomes change.

Related terms

Inferior Goods:

Inferior goods are consumer goods where demand decreases as income rises. As a person's income increases, they tend to purchase less of these goods.

Luxury Goods: Luxury goods are a type of normal good where demand increases disproportionately as income rises. These are goods that are not considered necessities but are desired for their quality or status.

Engel's Law: Engel's Law states that as income rises, the proportion of income spent on food falls, even if actual expenditure on food rises.