Suppose you get a pay rise. Feeling richer, you increase your consumption of your favourite beer. In this case, the beer is what is known as a normal good: consumption of it rise with income, and if your income fell you would consume less of it.
But now you are richer, you also drink less of cheap brand of cider you used to consume. In this case, the cider would be an inferior good – you consume less of it as your income rises, more of it when poorer. Luxury goods like a caviar or sports cars can be thought of as a special type of normal good for which consumption increases by proportionately more than income when income rises.
A normal good is a good or service that experiences an increase in quantity demanded as the real income of an individual or economy rises. A normal good is defined as having an income elasticity of demand coefficient that is positive but less than one. A good can also be classified as a luxury good or inferior good.
An inferior good is a type of good for which demand declines as the level of income increases. This occurs when a good has more costly substitutes that see an increase in demand as the person’s or the society’s economy improves. An inferior good is the opposite of a normal good, which experiences an increase in demand along with increases in the income level. Inferior goods can be viewed as anything a consumer would demand less of if they had a higher level of real income.
Of course , a good many sometimes be normal and sometimes inferior depending on the level of consumer’s income. If I get a pay rise I might drink more beer, but if I then win the lottery, I might ditch the beer completely and only ever drink champagne.