Normal Goods, Inferior Goods & Income Elasticity

- We discuss income elasticity of demand (YED) and how this dictates whether a good is classified as a normal good or an inferior good.

We also mention a few examples of each type of good in order to get some intuition as to why quantity demanded will react in different ways to changes in income.

YED = percentage change in quantity demanded /
percentage change in real income

Normal goods:
- Positive YED
- An increase in incomes causes an increase in demand
- Most goods are normal
- Higher YED means a larger increase in demand
- Luxury goods have YED greater than 1
- more elastic
- flatter demand curve

Inferior goods:
- Negative YED
- An increase in incomes causes a decrease in demand
- Usually low quality goods

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