Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What describes a normal good in economic terms?

1. A good that has negative elasticity of demand

2. A good that has positive elasticity of demand as income rises

3. A good that is inferior as income increases

4. A good that is only produced under monopoly conditions

The correct answer is: A good that has positive elasticity of demand as income rises

A normal good is defined in economic terms as one for which demand increases as consumer income rises. This relationship indicates that when individuals have more income, they will tend to buy more of these goods, reflecting their premium nature compared to inferior goods, which see reduced demand as income increases. Hence, as income rises, the consumption of a normal good is positively correlated with that increase in income, demonstrating positive elasticity of demand. In contrast, a good that has negative elasticity of demand would be categorized as an inferior good, where demand decreases as consumer income rises. The other options also misrepresent the characteristics of normal goods; for instance, the mention of monopoly conditions is not relevant to the classification of goods based on income changes. Thus, identifying a normal good is fundamentally linked to its behavior in response to changes in income, which is precisely captured by the notion of positive elasticity of demand as income rises.