Final answer:
Goods with an income elasticity of demand less than 0 are termed inferior goods because demand for these goods decreases as income increases. In contrast, normal goods have positive income elasticity and are divided into necessity goods with an elasticity below 1 and luxury goods with an elasticity above 1.
Step-by-step explanation:
When the income elasticity of demand is less than 0, this indicates that the good is inferior. This means that as income increases, the demand for the good decreases, which is opposite to the behavior of normal goods. Inferior goods are often less expensive or lower-quality versions of products, and people tend to purchase them when their income is lower. As their income rises, they switch to more expensive or higher-quality goods. An example of an inferior good might be instant noodles, where an increase in income might lead to purchasing fresh pasta instead. On the contrary, normal goods have positive income elasticity. These goods can be further classified into necessity goods (with income elasticity less than 1) and luxury goods (with income elasticity greater than 1). Necessity goods are essential items like food and basic clothing where demand increases with income but at a slower rate. Luxury goods, such as sports cars and designer clothes, see a more rapid increase in demand as income rises.