Normal goods are defined as having a positive income elasticity. We can divide normal goods into two types: Those whose income elasticity is less than one and those whose income elasticity is greater than one. Think about products that would fall into each category. Can you come up with a name for each category?

Necessity Goods : Income Inelastic (< 1)

Luxury Goods : Income Elasticity (> 1)

Explanation:

Elasticity is responsiveness of demand change to price change. Formula : - % change in demand / % change income

Normal goods have positive income elasticity, i. e. demand increase with income rise & decrease with income rise.

Necessity good's demand responds less to income change & is income inelastic (< 1), % change in demand < % change in price.

Eg : Medicines

Luxury good's demand is more responsive to income change & is income elastic (> 1), % change in demand > % change in price.

Eg : Luxury Cars