A good with income elasticity greater than 0 but less than 1 is generally classified as which type of good?

A good with income elasticity greater than 0 but less than 1 is generally classified as which type of good?

• A. Inferior good
• B. Normal good with inelastic income demand
• C. Luxury good
• D. Giffen good

Answer: (B)

When income elasticity of demand is positive but less than one, a good is a normal good whose quantity demanded rises with income, but not as fast as income does. That means as people earn more, they buy more of this good, but the percentage increase in quantity is smaller than the percentage increase in income. This is typical for everyday necessities where higher income leads to more consumption, but not a huge jump. Inferior goods have negative income elasticity, so they don’t fit. Luxury goods have income elasticity greater than one, meaning demand grows faster than income. Giffen goods are a special, unusual case of normally inferior goods with upward-sloping demand due to the income effect dominating the substitution effect.

When income elasticity of demand is positive but less than one, a good is a normal good whose quantity demanded rises with income, but not as fast as income does. That means as people earn more, they buy more of this good, but the percentage increase in quantity is smaller than the percentage increase in income. This is typical for everyday necessities where higher income leads to more consumption, but not a huge jump.

Inferior goods have negative income elasticity, so they don’t fit. Luxury goods have income elasticity greater than one, meaning demand grows faster than income. Giffen goods are a special, unusual case of normally inferior goods with upward-sloping demand due to the income effect dominating the substitution effect.