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Normal Goods

Goods whose demand shows a direct relationship with a consumer’s income

What are Normal Goods?

Normal goods are a type of goods whose demand shows a direct relationship with a consumer’s income. It means that the demand for normal goods increases with an increase in the consumer’s income or expansion of the economy (which generally will increase the income of the population).

 

Normal Goods

 

Normal goods demonstrate a higher income elasticity of demand than inferior goods. The former shows an elasticity between zero to one, while the latter shows a negative income elasticity of demand.

 

Normal Goods and Consumer Behavior

Demand for normal goods is determined by patterns in the behavior of consumers. Larger income leads to changes in the consumers’ behavior. As income increases, consumers may be able to afford goods that were not previously available to them.

In such a case, the demand for the goods increases due to their attractiveness to consumers. It may be explained by the higher quality of the goods, higher functionality, or more prestigious socio-economic value (think about many luxury goods).

Economists use income elasticity of demand to measure the extent to which the demand for a product reacts to a change in consumer income or purchasing power. It is calculated by dividing the change in product quantity demanded by the change in income. Income elasticity of demand is often used to differentiate between a normal, inferior, and luxury good, as well as forecast sales during periods of increasing or declining incomes.

CFI’s course on Behavioral Finance Fundamentals explores how human behavior affects the field of Finance.

 

Examples of Normal Goods

There are many examples of normal goods. However, goods that are considered normal in one region may be considered inferior in another region. The variation may be caused by local traditions, socio-economic, or geographic characteristics.

Common examples of normal goods include:

 

1. Electronics

Electronics are categorized as normal goods because people tend to spend more on electronic items, such as laptops, tablets, fitness trackers, and gaming systems whenever there is an increase in purchasing power.

Most electronics stores may stock different brands of specific electronic items, some of which may be inferior depending on consumer preferences and tastes. Most buyers tend to associate more with major brands such as Apple, Samsung, etc. when buying phones and TVs, and consider the off-brand electronics as inferior goods.

 

2. Organic food

As the world moves to healthy eating, most people tend to spend more on organic foods when there is an increase in income. Organic foods are grown hygienically compared to inorganic foods, and people are inclined to spend more on the former whenever they visit grocery stores. However, with declining incomes, people revert to inorganic foods, which cost less than their organic counterparts.

 

3. High-end restaurants

High-end restaurants are in the category of normal goods because people can afford expensive coffee and dine-outs when there is an increase in income. A higher purchasing power allows consumers to demand higher quality meals and blended drinks based on their unique tastes. When there is declining income, consumers fall back to the regular and backstreet restaurants for regular meals or home-cooked meals and drinks.

 

4. Clothes

Clothes can fall under normal and inferior goods depending on the location of the clothing store and quality of fabrics. As income rises, people tend to spend more on clothing at luxury clothing stores.

Consumers may also opt for designer clothing located in high-end markets when there is an increase in income. However, when the consumers’ income declines, people will still buy clothes but at retail outlets and consignment stores rather than luxury clothing stores.

 

5. Taxis

Consumers may prefer ride-hailing services like Uber and Lyft when there is an increase in income due to the convenience that comes with this option over the traditional modes of transport. However, with reduced income, consumers opt for crowded public transportation, such as buses and trains, which may be favorably priced compared to the dedicated modes of transport.

 

Normal Goods vs. Inferior Goods

Normal goods are the opposite of inferior goods, whose demand decreases with an increase in the consumer’s income or expansion of the economy (i.e., there is an inverse relationship between the demand and the consumer’s income).

Nevertheless, the distinction between normal and inferior goods is not homogeneous among different countries and geographic regions. One good can be normal in one country, while in another country, it is considered inferior. Several factors can influence the classification.

In addition, as time goes by, some of the normal goods may become inferior and vice versa. For example, railway travel. During the time when it was new, railway transport was considered as a normal (even luxury) good because it was the fastest way of traveling. Nowadays, in many countries, railway transport is an inferior good because it is much slower but more affordable than airplanes.

 

Additional Resources

CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional CFI resources below will be useful:

  • Consumer Surplus Formula
  • Law of Supply
  • Network Effect
  • Pigou Effect

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes!