What is a normal good?
A normal good is one that is experiencing an increase in demand due to an increase in consumer income. In other words, if there is an increase in wages, the demand for normal goods increases while, conversely, wage cuts or layoffs lead to a reduction in demand.
Understanding normal goods
A normal good, also called a necessary good, does not refer to the quality of the good but rather to the level of demand for the good in relation to wage increases or decreases.
A normal good has an elastic relationship between income and demand for the good. In other words, changes in demand and income are positively correlated or move in the same direction. Income elasticity of demand measures the magnitude with which the quantity demanded for a good change in response to a change in income. It is used to understand changes in consumption patterns that result from changes in purchasing power.
The income elasticity of demand can be calculated by taking the percentage change in the quantity demanded for the good and dividing it by the percentage change in income. A normal good has an income elasticity of positive demand, but less than one.
If demand for blueberries increases by 11 percent when overall income increases by 33 percent, then blueberries would have an income elasticity of demand of 0.33, or (0.11 / 0.33). Therefore, blueberries would be considered a normal good. Other examples of normal goods include staples, clothing, and appliances.
Economists use the income elasticity of demand to determine whether a good is a necessity or a luxury product. Firms also analyze the income elasticity of demand for their products and services to help predict sales during periods of economic growth leading to higher incomes or during economic downturns resulting in lower incomes.
Key points to remember
- A normal good is one that is experiencing an increase in demand due to an increase in consumer income.
- Normal goods have a positive correlation between income and demand.
- Examples of normal products include staples, clothing, and appliances.
Lower goods and normal goods
Lower goods are the opposite of normal goods. Lesser goods are goods that see their demand fall as consumers’ incomes rise. In other words, as an economy improves and wages increase, consumers prefer a more expensive alternative than inferior products. However, the term “inferior” does not refer to quality, but rather to affordability.
Public transport tends to have an elasticity of demand coefficient income that is less than zero, which means that its demand decreases as income increases, classifying public transport as a lower good. This reveals a generalization of human behavior; most people prefer to drive a car if given a choice. Lower goods include all the goods and services that people buy only because they cannot afford the better quality substitutes for those goods.
Luxury and normal products
Luxury goods, on the other hand, have an income elasticity of demand greater than one. If the demand for sports cars increases by 25% when the overall income increases by 20%, then sports cars are considered as luxury goods because they have an income elasticity of demand of 1.25. Other luxury goods include vacations, consumer durables, fine dining and gym memberships.
People spend a higher proportion of their income on luxury goods as their income increases, while people spend an equal or lesser proportion of their income on normal products and less as their income increases. In general, people with low incomes spend a higher proportion of their income on normal and lower goods than people with higher incomes. However, at the individual level, a particular good can be a normal good for one person but a less good or luxury good for another.
Example of a normal good
Let’s say Jack earns $ 3,000 a month and currently spends 40% of his income on food and clothing, or $ 1,200 a month. Jack gets a raise and now earns $ 3,500 a month for a 16% increase in income. Jack can afford more, so he increases 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 an increase of 16%. However, prove it by calculating the income elasticity of demand, which is done as follows: (percentage change in demand / percentage change in income).
The result is .625 or (.10 change in purchases /.16 change in income). Since food and clothing have an income elasticity of demand less than one, food and clothing would be normal goods.