Necessity good

In economics, a necessity good or a necessary good is a type of normal good. Necessity goods are products and services that consumers will buy regardless of the changes in their income levels, therefore making these products less sensitive to price change. Examples include repetitive purchases of different durations such as haircuts, habits including tobacco, everday essentials such as electricity and water, and critical medicine such as insulin. [1] Like any other normal good, an income rise will lead to a rise in demand, but the increase for a necessity good is less than proportional to the rise in income, so the proportion of expenditure on these goods falls as income rises.[2] If income elasticity of demand is lower than unity, it is a necessity good.[3] This observation for food, known as Engel's law, states that as income rises, the proportion of income spent on food falls, even if absolute expenditure on food rises. This makes the income elasticity of demand for food between zero and one. Inferior goods, which have a negative income elasticity (ξ < 0), are clearly necessity goods, but necessity goods have a positive income elasticity. when ξ < 1 (i.e. when an x% change in income causes a change in x less than x%). Therefore, the elasticity of demand of a necessity good is when ξ < 1 (i.e. when an x% change in income causes a change in x less than x%), thus between zero and one.[4]

Necessity goods are goods that we cannot live without and will not likely cut back on even when times are tough, for example food, power, water and gas.[5][6]

Distinction between luxury and necessity goods can be distinguished by the help of income elasticity of demand .The degree of necessity is as follows: The more necessary a good is, the lower the price elasticity of demand, as people will attempt to buy it no matter the price. If income elasticity of demand is lower than unity, it is a necessity good.[3]

Most necessity goods are usually produced by a public utility. According to Investopedia-site, stocks of private companies producing necessity goods are known as defensive stock. Defensive stock are stock that provides a constant dividend and stable earnings regardless of the state of the overall stock market.[7][8]

See also

References

  1. ↑ Staff, Investopedia (2004-01-11). "Income Elasticity of Demand". Investopedia. Retrieved 2018-06-01.
  2. ↑ Varian, Hal (1992). "Choice". Microeconomic Analysis (Third ed.). New York: W.W. Norton. pp. 116–143 [p. 117]. ISBN 0-393-95735-7. [...] as the consumer gets more income, he consumes more of both goods but proportionally more of one good (the luxury good) than of the other (the necessary good).
  3. 1 2 DEBABRATA., DATTA, (2017). MANAGERIAL ECONOMICS. [S.l.]: PRENTICE-HALL OF INDIA. ISBN 8120352416. OCLC 990641889.
  4. ↑ "Normal, inferior, necessary, and luxury goods". Open Textbooks for Hong Kong. Retrieved 2018-06-01.
  5. ↑ https://www.investopedia.com/articles/00/082800.asp
  6. ↑
  7. ↑ "Cyclical Versus Non-Cyclical Stocks". Investopedia. Retrieved 2009-03-18.
  8. ↑ "Defensive Stock". Investopedia. Retrieved 2009-03-18.
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