Question

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

Answer 1

1.Those goods whose income elasticity is greater than one are classified as Luxury goods. Products under such category are luxury cars, diamonds etc.

Reason-

We buy more of such goods when our income rises and we are willing to give up luxury goods more easily as our income falls. Hence, the elasticity of income is greater than 1.

2.Those goods whose income elasticity is less than one are classified as Necessity goods. Products under such category are etc.

Reason-

Even when the income rises or falls we cannot much change the demand as the good is a necessity. Hence, the elasticity of income is less than 1.

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