Normal goods have a relation to a person’s income. As income increases, purchases of normal goods also increase but by a lesser amount. This is because the income elasticity of normal goods is between 0 and 1. Elasticity can be calculated by dividing the increase in demand for a good by the increase in wages. For example, a 15% increase in wages results in a 5% increase in the purchase of clothing. The income elasticity is therefore .05/.15 = 0.33.
Normal goods are different from inferior or luxury goods. Inferior goods have an income elasticity of less than 1, while luxury goods have an income elasticity that is greater than 1.
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Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.
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