Normal Good

Most goods are normal goods. As people earn more, they tend to buy more clothes, eat out more often, travel more and buy better-quality products. When incomes fall, they cut back.

Normal goods have a positive income elasticity of demand. Economists divide them into two groups. Necessities, such as basic food and utilities, have an income elasticity between 0 and 1: demand rises with income, but less than proportionally. If income rises 10%, spending on electricity might rise only 2%. Luxuries, such as designer goods or overseas holidays, have an income elasticity above 1: demand rises more than proportionally. If income rises 10%, spending on foreign travel might rise 20%.

This distinction matters for businesses and investors. Companies selling luxuries usually do very well during economic booms but suffer more during recessions. Companies selling necessities tend to have steadier sales through economic ups and downs.

Whether a good is normal can depend on the consumer and the context. A product treated as a luxury in one country may be an everyday item in another.