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Normal Goods

2 March, 2015 - 12:11

A normal good is one whose consumption increases with an increase in income. When the price of a normal good falls, there are two identifying effects:

  1. The substitution effect contributes to an increase in the quantity demanded because consumers substitute more of the good for other goods.
  2. The reduction in price increases the consumer’s ability to buy goods. Because the good is normal,this increase in purchasing power further increases the quantity of the good demanded through the income effect.

In the case of a normal good, then, the substitution and income effects reinforce each other. Ms. Andrews’s response to a price reduction for apples is a typical response to a lower price for a normal good.

An increase in the price of a normal good works in an equivalent fashion. The higher price causes consumers to substitute more of other goods, whose prices are now relatively lower. The substitution effect thus reduces the quantity demanded. The higher price also reduces purchasing power, causing consumers to reduce consumption of the good via the income effect.