Normal good

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

Video Normal good

Analysis

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:

${\displaystyle \xi _{g}\geq 0,{\text{ where }}\xi _{x}={\frac {\Delta Q_{x}/Q_{x}}{\Delta Y/Y}}}$

In the above definition, Q_x 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.

There are two types of normal goods: necessity goods and luxury goods. A normal good is classified as a necessity good when ? < 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 ? > 1 (i.e. when an x% change in income causes a change in x greater than x%). A good where ? < 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. This would violate the economic rationality assumption.

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

Maps Normal good

Examples

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. 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.

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See also

• Consumer theory
• Superior good
• Ordinary good
• Giffen good

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References

Source of article : Wikipedia