Q.31 31. Economists define normal goo... [FREE SOLUTION]

Chapter 5: Q.31 (page 131)

31. Economists define normal goods 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?

Short Answer

Expert verified

Luxury products have a higher income elasticity of demand than necessity goods, and necessity goods have a lower income elasticity of demand.

Step by step solution

Definition

Income Elasticity:

The responsiveness of a consumer's demand to a change in income level is known as income elasticity. Some items have positive demand elasticity, whereas others have negative demand elasticity. The ratio of the percentage change in quantity demanded to the percentage change in income is used to determine the income elasticity of demand.

Explanation

With a greater than one income elasticity of demand, the percent increase in the quantity required exceeds the proportionate rise in income. When it comes to luxury items, a customer behaves in this manner. As one's income rises, so does the cost of a restaurant dinner.

Demand elasticity of income less than one, on the other hand, means that the percent increase in the quantity required is smaller than the corresponding rise in income.

Normal goods are characterized as having a positive income elasticity, which means that when income rises, the amount sought for that product rises as well.

This is where the phrase "necessity is the mother of invention" comes from. Cereals or basic clothes are two examples of such items.

Conclusion

Therefore, the two types of normal goods are luxury goods such as perfumes, movie tickets, vacation, etc, and necessities such as basic clothing, cereals, etc.