Empirical studies find that basic food items—such as vegetables, bread,
and cereals—usually have positive income elasticities less than 1 (so an
increase in income of 10 percent leads to an increase in quantity
demanded of less than 10 percent). Such goods are often called
necessities In contrast, more expensive foods—such as high-quality cuts
of meat, prepared meals, and wine—usually have positive income
elasticities greater than 1 (so an increase in income of 10 percent leads to
an increase in quantity demanded of more than 10 percent). These
products are often called luxuries In our two examples above, the
computed income elasticities indicate that snow shovels are a necessity
while snow boards are luxuries.
The more necessary an item is in the consumption pattern of consumers, the lower is its
income elasticity.Income elasticities for specific products also vary with the level of a
consumer’s income. When incomes are low, consumers may eat almost
no green vegetables and consume lots of starchy foods, such as bread and
pasta; when incomes are higher, they may eat cheap cuts of meat and
more green vegetables along with their bread and pasta; when incomes
are higher still, they are likely to eat higher-quality and prepared foods of
a wide variety.
Inferior Goods
Notice that both necessities and luxuries have positive income elasticities
and thus are normal goods. In contrast, inferior goods have a negative