Final answer:
Normal goods have a positive income elasticity and are divided into necessities, with income elasticity less than one, and luxuries, with income elasticity greater than one. Necessities are essential products like food and clothing, while luxuries are non-essential items like luxury cars and jewelry.
Step-by-step explanation:
Economists define normal goods as items for which demand increases as the income of individuals increases, and they have a positive income elasticity. Income elasticity of demand measures how the quantity demanded changes as consumer income levels change. Normal goods can be categorized based on their income elasticity into two types: necessities and luxuries.
Goods with an income elasticity of less than one are considered as necessities. These are products that are essential for daily living, and consumers will buy more of these as their income rises, but the increase in quantity demanded is proportionally less than the increase in income. Examples include food and clothing. On the other hand, goods with an income elasticity of greater than one are categorized as luxuries. These are non-essential items that consumers purchase in greater quantities as their income increases, and the proportional increase in demand is greater than the proportional increase in income. Luxury cars and expensive jewelry are examples of luxury goods.