Final answer:
The relationship between elasticity and normal/inferior goods is encapsulated in the concept of income elasticity of demand: normal goods have a positive income elasticity and demand rises with income, while inferior goods have a negative income elasticity with demand falling as income increases.
Step-by-step explanation:
The relationship between elasticity and normal/inferior goods is well understood through the concept of income elasticity of demand. Income elasticity of demand measures how the quantity demanded of a good responds to a change in consumers' income. For normal goods, which are items that individuals consume more of as their incomes increase, the income elasticity is positive. This means that as income goes up, the demand curve for normal goods shifts to the right, indicating an increased quantity demanded.
In the case of normal goods, there can be variations in how sensitive the demand for the good is to changes in income. Normal goods with an income elasticity of less than one are known as necessities, where increases in income lead to a proportionally smaller increase in demand. On the other hand, normal goods with an income elasticity greater than one are termed luxury goods, and they experience a proportionally larger increase in demand as income rises.
Conversely, inferior goods are those goods where demand decreases as income increases—the income elasticity of demand for these goods is negative. As consumers' incomes rise, they tend to purchase less of these inferior goods, causing the demand curve to shift to the left. The magnitude of the shift in both cases depends on how large the respective income elasticity is, be it positive for normal goods or negative for inferior goods.
The concept of income elasticity of demand is fundamental to understanding consumer behavior and how the demand for certain goods changes with income levels. Both marketers and economists can use this information to predict changes in the market and set effective strategies for pricing and product development.