Definition: A normal good is a product or service whose quantity demanded increases as consumer income increases. The elasticity of demand for a normal good is always positive but less than 1 (0 < E < 1).
What Does Normal Good Mean?
What is the definition of normal good? Normal goods have a positive correlation with price, and they are elastic because the quantity demanded changes to the same direction with the change in real income. A pay raise or extra money in the pocket cause the quantity demanded to increase. A layoff causes the quantity demanded to decrease.
It all comes down to the purchasing power of consumers and the ability to spend so much money as to satisfy the need for a product or a service. Examples of normal goods include food, clothing, and household appliances.
Let’s look at an example.
Example
Madeleine works as a receptionist at a local restaurant, and she earns $1700 per month. She doesn’t have a family, and she lives in a rented apartment downtown. Because she doesn’t have to cater for anyone else than herself, Madeleine spends one-third of her salary on food, and she also goes to the movies, eat out and travel. Her weekly shopping list includes pasta, cheese, meat, milk, eggs, rice, fruits, and vegetables. For these goods, Madeleine spends around $135 per week.
Last week, her boss told Madeleine that, effective next Monday, he will raise her monthly salary to $2,100.
Assuming that Madeleine keeps on spending one-third of her salary on food, she will be able to spend $700 instead of $567 that she was spending before the pay raise. Moreover, she is not willing to change her consumption patterns, which means that she can spend more money at the grocery store, thereby buying larger quantities.
The goods that Madeleine is buying are normal goods because the quantity that she buys (demands) increases as a result of her salary raise (real income). In the same way, if Madeleine had lost her job, she would spend less money, following the decrease in her real income.
Summary Definition
Define Normal Goods: Normal good means a product that consumers purchase more of as their income levels rise.
