Course Outline

Dictionary of Economics

Course (113 videos)

Normal Goods

What is a normal good?

A normal good describes all goods and services for which demand increases when income increases.

When you're a student, your income is typically very limited. But after graduating and getting a job, your income goes up – and the types of goods and services you demand are probably going to change. You may buy a new car, get a nicer apartment or purchase your first house, and start eating out at nicer restaurants. These are all examples of normal goods.

Now what happens to the demand for normal goods during an economic boom? Or what about a recession? We’ll explore how both of these situations affect the demand for normal goods in the video.

Want to learn more about demand and how people make choices about consumption? Check out our Micro sections on Supply, Demand, and Equilibrium and Consumer Choice.

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Transcript

What is a normal good? A normal good describes all goods and services for which demand increases when income increases.

 

Imagine you're a poor student, but when you graduate, you get a high-paying job. With that new high-paying job, your income goes up, and you're probably going to demand more automobiles, more housing, more fine dining. These are normal goods -- demand for them goes up when income goes up, and demand for them goes down when income goes down.

 

Now let's graph what happens to the demand for fine dining, a normal good, during two situations -- during a boom and during a recession. Here's our demand for these restaurants. What is going to happen to this demand when the economy goes into a boom, when people's incomes go up? In a boom, the demand for these restaurants is going to increase because it's a normal good so we get an increase in demand. What about in a recession? Of course, in a recession, we get the opposite. In a recession, when incomes are going down, the demand for these restaurants is also going down.

 

So we see how demand for a good or service is affected by your income. But income isn't the only thing that can affect demand.

 

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