normal good

(noun)

A good for which demand increases when income increases and falls when income decreases but price remains constant.

Related Terms

Examples of normal good in the following topics:

  • Income Elasticity of Demand

    • A positive income elasticity is associated with normal goods.
    • This is typical of a luxury or superior good.
    • This is characteristic of a necessary good.
    • These are called sticky goods.
    • This is an inferior good (all other goods are normal goods).

  • Impact of Income on Consumer Choices

    • The simplest way to demonstrate the effects of income on overall consumer choice, from the viewpoint of Consumer Theory, is via an income-consumption curve for a normal good(see ).
    • As a result, it is useful to outline the differences in income effects on normal, inferior, complementary and substitute goods:
    • Normal:A normal good is a good with incremental increases or decreases in utility as quantity changes, demonstrating a predictable and simple linear relationship as income increases or decreases. demonstrates a graphical representation of the effects of income changes upon preference map.
    • Inferior:Inferior goods, or goods that are less preferable, will demonstrate inverse relationships with income compared to normal goods.
    • Complementary: Complementary goods are goods that are interdependent in consumption, or essentially goods that require simultaneous consumption by the consumer.

  • Deriving the Demand Curve

    • Generally speaking, normal goods will demonstrate a higher demand as a result of lower prices and vice versa.
    • The derivation of demand curves for normal goods is therefore relatively predictable in respect to the direction of the slope on a graph (see ).
    • Giffen Goods - Giffen goods are a situation where the income effect supersedes the substitution effect, creating an increase in demand despite a rise in price.
    • Neutral Goods - Neutral goods, unlike Giffen goods, demonstrate complete ambivalence to price.
    • This graph illustrates the derivation of a demand curve for these goods.

  • Ceteris Paribus

    • What would happen for the demand for a normal good when income increases, ceteris paribus?
    • In this case, as depicted in , a consumer's preferences for the good and his demand for complements and substitutes are being held constant along with other attributes that could potentially impact his demand for a good, such as the good's price.
    • This allows for an analysis of the increase in income, on the consumer's demand for the single good alone.
    • A consumer is able to purchase a normal good and has a demand curve, D1, which provides the relationship between price and quantity given his preferences, income and other consumption attributes.
    • The consumer would then move his consumption for the good from Q1 to Q2, increasing his purchase of the good.

  • Demand Function

    • An individual's demand function for a good (Good X) might be written:
    • When a good is a "normal" good, there is a positive relationship between the change in income and change in demand; an increase in income will increase (shift the demand to the right) demand.
    • A superior good is a special case of the normal good.
    • In Figure III.A.2 an increase in income will shift the Demand function ("Demand") for a normal good to the right to DINCREASE.
    • For a normal good a decrease in income will shift the demand to DDECREASE.

  • Changes in Demand and Shifts in the Demand Curve

    • Demand is the relationship between the willingness to purchase a quantity of a good or service at a specific price.
    • An increase in income will cause an outward shift in demand (to the right) if the good or service assessed is a normal good or a good that is desirable and is therefore positively correlated with income.
    • Alternatively, an increase in income could result in an inward shift of demand (to the left) if the good or service assessed is an inferior good or a good that is not desirable but is acceptable when the consumer is constrained by income .
    • The demand curve for a good will shift in parallel with a shift in the demand for a complement.
    • A demand curve provides an economic agent's price to quantity relationship related to a specific good or service.

  • The Law of Demand

    • If the income of the consumer, prices of the related goods, and preferences of the consumer remain unchanged, then the change in quantity of good demanded by the consumer will be negatively correlated to the change in the price of the good or service.
    • Though in general terms and specific to normal goods, demand will exhibit a downward slope, there are exceptions: Giffen goods and Veblen goods
    • A Giffen good describes an extreme case for an inferior good.
    • example of a Giffen good, though a popular albeit historically inaccurate example is the purchase of potatoes (an inferior good) as prices continued to increase during the Irish potato famine.
    • These goods are known as a Veblen goods.

  • Applications of Principles on Consumer Choices

    • In we are comparing 'Good X' and 'Good Y' to identify how a change in income will alter the overall amount of each good would likely be purchased along a series of indifference curves (see Boundless atom on 'Indifference Curves').
    • This translates to the graph above as the consumer makes choices to maximize utility when comparing the price of different goods to a given income level, substituting cheaper goods and more expensive goods dependent upon purchasing power.
    • With normal goods, an increase of income will correlate with a higher quantity of consumption while a decrease in income will see a decrease in consumption.
    • Inversely, Giffen goods demonstrate a positive relationship, where the price rises will result in higher demand for the good and high consumption.
    • To apply this to the concept of different types of goods above, one can view wage rates and leisure time as consumer goods.

  • Relationship Between Output and Revenue

    • Output is the amount of a good produced; revenue is the amount of income made from sales minus all business expenses.
    • Revenue, also known as turnover, is the income that a company receives from normal business activities, usually from the sale of goods and services.
    • Revenue is the money that is made as a result of output, or amount of goods produced.
    • The quantity of goods produced must meet public demand, but the company must also be able to sell those goods in order to generate revenue.
    • The production of goods carries a cost, so companies want to find a level of output that maximizes profit, not revenue .

  • Price Indices and the Rate of Change of Prices

    • A price index is a statistic designed to help compare how a normalized average of prices differ between time periods.
    • Most often, the base period for an index is a single year and normalized.
    • In 1950, the CPI would have a value of 100 (this is not the cost of the basket, just a normalized value).
    • The basket of goods should reflect these proportions.
    • The CPI reflects changes in the prices of goods and services typically purchased by consumers, and includes price changes in imported goods.