Normal goods are products or services for which demand increases as consumers' incomes rise. In simpler terms, as people earn more money, they tend to spend more on these goods. This positive relationship between income and demand is the key distinguishing factor that distinguishes this type of economic goods.
Normal goods can be sub-divided into:
In this article, I will explain the concept of normal goods and their significance in the context of consumer demand, and how they relate to Engel curves.
The concept of income elasticity measures how sensitive the demand for a good is to changes in income levels. Since we know that normal goods experience extra demand as income rises, we know that they have a positive income elasticity of demand. This is particularly true of luxury goods, which have a much higher income elasticity than basic necessities.
The point here is that economists use estimates of income elasticities to predict which goods will experience the most additional demand during periods of rapid economic growth and, conversely, which goods will suffer the greatest loss of demand should the economy go into recession.
Normal goods are frequently considered alongside inferior goods. Inferior goods exhibit negative income elasticity of demand, because consumers prefer to substitute better alternatives in their stead whenever their incomes rise. Typically, they are of lower quality or less desirable compared to alternatives so, as consumers become wealthier, they switch to superior options.
The Engel curve is a useful tool for understanding the relationship between a consumer’s income and his/her expenditure on a specific good. It was developed by the German statistician Ernst Engel in the 19th century. Engel observed that as a consumer’s income increases, the preferred spending on different goods and services also changes.
For normal goods, the Engel curve exhibits an upward-sloping pattern. As income rises, the demand for the normal good increases, resulting in a movement along the curve upwards and to the right e.g., from point A to point B in the graph above.
Conversely, for inferior goods, the Engel curve displays a backward-sloping pattern. As income rises further, the demand for that same good (economy burgers) declines, indicating that it has become an inferior good beyond a given income level ($40 in the graph). We might assume here that an income above $40 allows the consumer to substitute a better alternative i.e., premium burgers or some other preferred item.
For more details, see my article about The Engel Curve.
While the income elasticity of demand explains how consumption changes after a given increase in income, it fails to distinguish between the income effect alone, and the desire to substitute superior alternatives.
The substitution effect accounts for this by focusing on the change in the relative prices of goods. When the relative price of a good increases, consumers may choose to substitute other goods in place of it i.e., alternative goods that have become relatively cheaper. The substitution effect is closely related to consumer preferences and the desire to maximize utility while staying within budget constraints.
The substitution effect complements the income effect in influencing changes in the quantity demanded of normal goods.
The main uses of economic analysis around the consumption patterns of normal goods are:
Let's examine five real-world examples to better understand normal goods and their impact on consumer behavior and the economy.
In conclusion, normal goods are an integral aspect of consumer behavior and economic analysis. As income levels rise, consumers tend to increase their spending on normal goods, which influences various economic indicators.
Understanding the distinction between normal goods and other types of economic goods enables policymakers and businesses to make informed decisions and anticipate market trends.
The Engel curve further illustrates the relationship between normal goods and inferior goods, providing valuable insights into consumer preferences and expenditure patterns.