Final answer:
Normal goods see increased demand with rising consumer income and are divided into necessities (income elasticity < 1) and luxury goods (income elasticity > 1). Necessities are essential items like food and clothing, whereas luxury goods include high-end items like sports cars and jewelry.
Step-by-step explanation:
Normal goods are products whose demand increases as consumers' income rises, demonstrating a positive income elasticity. Economists categorize normal goods based on their income elasticity into two primary types: those with an elasticity of less than one, and those with an elasticity greater than one.
Products with an income elasticity less than one are necessary goods or Necessities, such as food and clothing. Demand for these goods increases with income but at a slower rate compared to the increase in income. On the other hand, products with an income elasticity greater than one are often seen as Luxury Goods. These are items like luxury cars, vacations in Europe, and fine jewelry, where demand grows faster than income.
To summarize, normal goods can be divided into necessities, which are essential for daily living and exhibit a lesser reaction to income changes, and luxury goods, which are high-end products that consumers buy more of as their income significantly increases. This categorization is essential for businesses and economists to understand consumer purchasing behavior as it relates to income fluctuations.