In
economics
Economics () is the social science that studies the production, distribution, and consumption of goods and services.
Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...
, a necessity good or a necessary good is a type of
normal good
In economics, a normal good is a type of a good which experiences an increase in demand due to an increase in income, unlike inferior goods, for which the opposite is observed. When there is an increase in a person's income, for example due to a w ...
.
Necessity goods are product(s) and services that consumers will buy regardless of the changes in their income levels, therefore making these products less sensitive to income change. Examples include repetitive purchases of different durations such as haircuts, addictive habits including tobacco, everyday essentials such as electricity and water, and critical medicine such as insulin. As for 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.
If income elasticity of demand is lower than unity, it is a necessity good.
This observation for food, known as
Engel's law
Engel's law is an economic relationship proposed by the statistician Ernst Engel in 1857. Even though Engel's law was proposed roughly 160 years ago, it holds relevance today in the context of poverty, especially the reduction of poverty. For ...
, 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.
Some necessity goods are produced by a
public utility
A public utility company (usually just utility) is an organization that maintains the infrastructure for a public service (often also providing a service using that infrastructure). Public utilities are subject to forms of public control and r ...
. According to Investopedia, stocks of private companies producing necessity goods are known as
defensive stocks. Defensive stocks are stocks that provide a constant
dividend
A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...
and stable
earnings Earnings are the net benefits of a corporation's operation. Earnings is also the amount on which corporate tax is due. For an analysis of specific aspects of corporate operations several more specific terms are used as EBIT (earnings before intere ...
regardless of the state of the overall stock market.
See also
*
Basic needs
The basic needs approach is one of the major approaches to the measurement of absolute poverty in developing countries globally. It works to define the absolute minimum resources necessary for long-term physical well-being, usually in terms of ...
*
Income elasticity of demand
In economics, the income elasticity of demand is the responsivenesses of the quantity demanded for a good to a change in consumer income. It is measured as the ratio of the percentage change in quantity demanded to the percentage change in incom ...
*
Wealth (economics)
Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an ...
References
Goods (economics)
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