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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 the 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. The 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 higher 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).

 

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

 

Normal Goods vs. Inferior Goods

Normal goods are the opposite of inferior goods, whose demand decreases with the 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 invented, 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.

 

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.

The most common examples include:

  • Organic food
  • Fine dining
  • Cars
  • Gym memberships

 

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 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!