What is a Normal Good?

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Definition:

A normal good is anything that consumers buy more of when their incomes go up — Which is what you would normally expect to happen.

🤔 Understanding normal goods

Normal goods are consumer products that exhibit the normal relationship between demand and income. When a consumer's income increases, they tend to respond by spending some or all of it. The items whose demand increases are normal goods. In contrast, consumers sometimes move from lower-quality products to more expensive alternatives when their incomes go up. Products that have falling demand as incomes rise are called inferior goods. The vast majority of consumer products are normal goods, which include most food, clothing, and household products.

Example

Imagine that you got a 10% raise today. When your next paycheck comes, you’ll have 10% more money than your typical budget allows. Think about where that extra money will go. You probably won’t increase your rent by 10% or buy 10% more milk. But you might spend a little more money on things you couldn’t afford before. Maybe go to the movies more often, or dine out at a restaurant a few more times a month. Those things that you buy with that extra pay are normal goods.

Takeaway

Normal goods are like a tray of hors d’oeuvres…

When the waitstaff walks by carrying a tray of finger foods, you might take one of what they are offering. You probably wouldn’t take more than one to ensure everybody gets some. But if the tray comes back around, you might partake again. That’s the way we all expect each other to act, so that’s what we generally consider normal. When the opportunity presents itself, you increase your consumption.

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What is a normal good?

A normal good is anything that you buy more of when you get a pay raise. Put another way, the demand (the amount you are willing to buy at a given price) for a normal good will increase as people's income goes up. In contrast, an inferior good is something that you typically buy more of as your income decreases. In general, normal goods are higher-quality substitutes for inferior goods.

General consumption categories are normal goods. For instance, food, electronics, clothing, entertainment, and transportation are all things that people tend to spend more money on as their income goes up. But within those general categories are items that may react differently to changes in wealth. Therefore, items can move between luxury, normal, and inferior goods, depending on a person’s income level.

Consider Uber rides. If your income is low, you might use public transportation. As your income goes up, you might switch to more Uber rides and fewer trips on the bus. That makes Uber rides a normal good. But if your income increases further, you might buy a car or subscribe to a car service. At that point on the income level spectrum, Uber rides become an inferior good. Throughout the income-level continuum, you’re spending more and more money on transportation. But you’re doing it by substituting goods within the category.

The same thing usually happens with food, clothing, and other products. The general tendency is to increase the amount you’re spending as your disposable income goes up. But you might graduate from low-end ramen noodles to premium pasta as you make more money. Likewise, you might buy fewer store-brand t-shirts and more name-brand polos as your paycheck gets bigger.

What makes a good a normal good?

The key to a product being considered a normal good is that it has a positive income elasticity of demand (a change in demand and change in income move in the same direction). Most products have this relationship, which is why they are considered to be normal.

Income elasticity is a microeconomics concept that measures how sensitive the demand for a product is to alterations in income. To calculate income elasticity, divide the percentage change in consumption by the percentage change in income:

Income elasticity = % change in quantity purchased / % change in income

For example, imagine you get a 10% pay raise. As a result, you start eating out 11 times a month rather than 10 times (without any change in the price of the meals). That’s a 10% increase in demand for restaurant food. Therefore, your income elasticity for eating out is 1.0, which means it’s a normal good.

Eating out more often implies that you buy fewer groceries. Maybe, that 10% increase in income results in a 5% reduction in deli meat. That means that the income elasticity of deli meat is -0.5. The negative income elasticity of demand indicates that deli meat is an inferior good.

It’s also worth pointing out that a product with an income elasticity greater than one is usually called a luxury good. These are items like vacations, lobster dinners, and jewelry. They are normal goods that are very sensitive to changes in price and income levels. Therefore, they are the last things you typically add to your household budget and are often the first things that get cut out when income falls.

It's important not to confuse a product's price elasticity of demand for its income elasticity. Price elasticity has to do with the law of demand, which states that all products — normal, luxury, or inferior goods — have an inverse relationship with price. The difference between these goods lies in how the demand curve shifts as income changes, and not in the slope of the demand curve itself. If an increase in income causes the demand curve to shift to the right, it's a normal good — regardless of the price elasticity of the product.

What are some examples of normal goods?

A complete list of normal goods would be incredibly long. Almost every product is a normal good, with the exception of lower-priced items. Here are some examples:

Transportation: If you have more money, you tend to drive and fly more often. You might even buy a second car. That makes gasoline, airplane tickets, and even automobiles all normal goods.

Food: At very low-income levels, people might only eat enough to survive. As people see their wages grow, they tend to eat for pleasure as well as subsistence. Food, as a general category, is a normal good. Going out to restaurants is also an example of a normal good, as people typically cook for themselves less often when they have more money.

Electronics: In the modern world, technology is all around us. And we tend to buy more of it as we can afford to do so. At lower levels of income, a household might have a television. As income increases, computers and gaming systems enter the picture. Add more pay, and you may see smartphones, tablets, and robotic vacuum cleaners appear.

Clothing: Your wardrobe also generally expands with your wages. People with less money probably don’t go clothes shopping very often. But as their paychecks get larger, their closets get fuller, and their shoe racks overflow. In general, fashion is a normal good.

Household items: Most household items stay pretty constant, regardless of income. You probably wouldn’t expect people to buy much more shampoo, laundry soap, or cleaning supplies as income increases. But you might see more weed killer, scented candles, and fabric softener getting purchased by middle-income households than lower-income ones. So long as demand doesn’t go down as income rises, those are normal goods.

Entertainment: People tend to find new ways to entertain themselves when they have more money to spend. Things like going to the movie theater, arcade, and pool hall are normal goods. The same is true of concerts, sporting events, and performing arts. If you’re more likely to go to these places when your income is higher, then they are normal goods.

Personal Care: Almost everyone enjoys a day at the spa getting a massage or pedicure. And many people spend time and money making sure they look their very best. But you’re likely to find a correlation between the frequency that someone sees a masseuse, stylist, or technician and their income level. That means these are normal goods.

Charity: As income goes up, many people find it easier to give some of their money away to causes they support. Therefore, charitable donations can be considered normal goods — so long as the donor is receiving some personal satisfaction from making the gift.

What is the difference between normal goods and inferior goods?

The demand for normal goods increases as income rises, while the demand for inferior goods increases as income falls. Normal goods are things like movie tickets, gasoline, and shoes. If you make more money, you buy more normal goods. Inferior goods are things like beans, bologna, and bus tickets. If you make more money, you typically substitute away from inferior goods.

What is the difference between normal goods and giffen goods?

There is also a special type of inferior good, called Giffen goods, that is worth noting. There are certain income levels at which the relationship between the price and the consumption of a Giffen good gets strange.

Specifically, it’s possible for people to increase consumption in response to a higher price. That’s because a tight budget doesn’t allow normal substitution to occur. For instance, if the price of potatoes goes up, a very low income person might stop buying beef and end up buying more potatoes.

What is the difference between normal goods and luxury goods?

Luxury goods are things that people only buy when their income is high enough to meet their basic needs and still have funds left. Normal goods tend to be those basic needs, which people buy more of at middle-income levels. Luxury goods are things like trips to Disneyland, cruises in the Caribbean, Broadway shows, fancy suits, designer purses, caviar, and diamond earrings. Most people don’t buy a lot of luxury goods.

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