Student Question

Give an example of a normal good.

Will the income elasticity of this good be greater than or less than 1? Explain.

Expert Answers

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The broad category of consumer goods are luxury goods, normal goods, and inferior goods. Elasticity is a measure of the responsiveness of the product's price to a change in income or the economy. A normal good is a good whose price increases as people's incomes increase. As such, normal goods are usually income-elastic; however, their coefficient of elasticity is less than 1. Normal goods are sometimes called "necessary goods" (as opposed to inferior goods, whose demand decreases as income rises). Normal goods are different from luxury goods insofar as luxury goods have a high elasticity of demand. This means that if a consumer is wealthier, they will buy much more of the product (despite an increase in price). A normal good's price will also increase when income increases or the economy expands; however, the income elasticity is less than one, which means that the price or demand increase is proportionally smaller than the increase in income. An example of a normal good is food; an individual who makes more money might buy a nicer variety of food, but there is a limit to how much more this individual is likely to consume.

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