Necessity good
Also called: Necessities, Essential goods · Topic: Consumer Behaviour, Demand and Elasticity · NCERT: Class 12, Ch 2 "Theory of Consumer Behaviour"
Meaning
A necessity good is a normal good that people need for daily life, such as foodgrains, salt or basic clothing. When income rises, people buy more of it, but the increase is smaller than the rise in income. In technical terms, its income elasticity of demand is between 0 and 1. Income elasticity measures how strongly demand reacts to a change in income.
eY = % change in quantity demanded ÷ % change in income, where 0 < eY < 1
Necessity goods are usually also price inelastic, meaning the quantity bought changes only a little when the price changes, because people cannot easily cut back on them. This explains why food prices jump sharply after a small supply shock, and why a bumper harvest can reduce farmers' total earnings.
Example
Suppose a family's income rises by 10% and its rice purchases rise by only 4%. Then eY = 4 ÷ 10 = 0.4, so rice is a necessity for this family. This pattern also shows up in India's household surveys. Under Engel's law, the share of income spent on food falls as incomes rise. HCES data show the rural food share falling from about 52.9% in 2011-12 to about 46.4% in 2022-23.
Don't confuse with
- Luxury good: demand rises by a larger percentage than income (eY > 1), and demand is usually price elastic. Examples are jewellery and foreign travel.
- Inferior good: demand falls when income rises (eY < 0), as with coarse grains for richer households. A necessity is still a normal good, so its demand rises with income, only slowly.