Normal good

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Graph of a normal good
Example of a normal good: As income increases from B1 to B3, the outward movement of utility curve I dictates that the quantity of good X1 increases in tandem. Therefore, X1 is a normal good. Put another way, the positively sloped income consumption curve demonstrates that X1 is normal. The Engel curve of X1 would also be positively sloped.

In economics, a normal good is any good for which demand increases when income increases, i.e. with a positive income elasticity of demand.[1][2]

Analysis[edit]

A good is normal when the income elasticity of demand is greater than or equal to zero. In mathematical terms, good g is normal if and only if:

In the above definition, Qx represents the quantity of good x demanded and Y represents the income of the given consumer being modeled. Intuitively, a good is normal if a change in the consumer's income causes the same direction change in the consumer's demand for good x.[3]

There are two types of normal goods: necessity goods and luxury goods. A normal good is classified as a necessity good when ξ < 1 (i.e. when an x% change in income causes a change in x less than x%), whereas a normal good is a luxury good when ξ > 1 (i.e. when an x% change in income causes a change in x greater than x%).[4] A good where ξ < 0 is an inferior good.

According to economic theory, there must be at least one normal good in any given bundle of goods (i.e. not all goods can be inferior). Economic theory assumes that a good provides always marginal utility (holding everything else equal). Therefore, if consumption of all goods decrease when income increases, the resulting consumption combination would fall short of the new budget constraint frontier.[3] This would violate the economic rationality assumption.

When the price of a normal good is zero, the demand is infinite.

Examples[edit]

Examples of Normal vs. Inferior Goods
Category Normal Good Inferior Good
Food & Drink
  • Fine dining[5]
  • Beer
  • Wine
  • Water[3]
  • Potatoes
  • Rice
  • Instant noodles[6]
Transportation
  • Sports cars
  • Luxury cars
  • Public transportation[6]
  • Low-end used cars
Other
  • Clothing
  • Household appliances
  • Consumer durables
  • Gym memberships[5]
  • Vacations[3]
  • Jewelry
  • Discount store goods (e.g. Walmart)[7]
  • Pirated goods
  • Human meat[3]
  • Cigarettes[5]

A caveat to the table above is that not all goods are strictly normal or inferior across all income levels. For example, average used cars could have a positive income elasticity of demand at low income levels - extra income could be funneled into replacing public transportation with self-commuting. However, the income elasticity of demand of average used cars could turn negative at higher income levels, where the consumer may elect to purchase new and/or luxury cars instead.

Another potential caveat is brought up by "The Notion of Inferior Good in the Public Economy" by Professor Jurion of University of Liège (published 1978). Public goods such as online news are often considered inferior goods.[8] However, the conventional distinction between inferior and normal goods may be blurry for public goods. (At least, for goods that are non-rival enough that they are conventionally understood as "public goods.") Consumption of many public goods will decrease when a rational consumer's income rises, due to replacement by private goods, e.g. building a private garden to replace use of public parks. But when effective congestion costs to a consumer rises with the consumer's income, even a normal good with a low income elasticity of demand (independent of the congestion costs associated with the non-excludable nature of the good) will exhibit the same effect. This makes it difficult to distinguish inferior public goods from normal ones.[9]

See also[edit]

References[edit]

  1. ^ "Economics A-Z terms beginning with N". The Economist. Retrieved 2018-03-06. 
  2. ^ "What is normal good? definition and meaning". BusinessDictionary.com. Retrieved 2018-03-06. 
  3. ^ a b c d e M.,, Perloff, Jeffrey. Microeconomics (Seventh edition ed.). Boston. ISBN 9780133456912. OCLC 876140973. 
  4. ^ "Income Elasticity". EconPort. 2006. 
  5. ^ a b c Staff, Investopedia (2007-06-21). "Normal Good". Investopedia. Retrieved 2018-03-06. 
  6. ^ a b "Inferior Good - Full Explanation & Example | InvestingAnswers". www.investinganswers.com. Retrieved 2018-03-06. 
  7. ^ "Today in classism". The Economist. Retrieved 2018-03-06. 
  8. ^ Chyi, Hsiang Iris (Autumn 2009). "Is Online News an Inferior Good? Examining the Economic Nature of Online News among Users". Journalism and Mass Communication Quarterly. 86: 592–612 – via Sage Journals. 
  9. ^ Jurion, B.J. (January 3, 1978). "The Notion of Inferior Good in Public Economy". Annals of Public and Cooperative Economics. 49 – via Wiley Online Library.