Final answer:
Normal goods are categorized into necessities and luxuries based on whether their income elasticity is less than one or greater than one, respectively. Inferior goods are those that decrease in demand as consumer income rises.
Step-by-step explanation:
Economists define normal goods as having a positive income elasticity, meaning the demand for such goods increases as consumer income rises. Normal goods can be categorized further based on their income elasticity: those with an income elasticity less than one, known as necessities, and those with an elasticity greater than one, known as luxuries. Necessities are essential for daily living and consumption doesn't increase proportionally with income, whereas luxuries are non-essential and their consumption increases more than proportionally as income grows. Inferior goods, on the other hand, see decreased demand as income rises, as consumers will typically opt for higher-quality substitutes.