Question

Explain how the concept of "inferior" goods and "normal" goods operate in a household when income increases.

Answer 1

Normal good is that good which has positive income elasticity. It means with the increase in the income, the quantity demand for the normal good increases.

On the other hand, inferior good has negative income elasticity. It means with the increase in the income, the quantity demand for the inferior good decreases.

Since income elasticity measures the effect of change in the income of the consumers on the demand for the goods.

Income elasticity of demand of X = % change in the quantity demand of good X/ % change in the Income.

Hence in case of inferior good there is negative relationship between income and quantity demand.

Hence in case of normal good there is positive relationship between income and quantity demand.