In
economics
Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and interac ...
, a necessity good or a necessary good is a type of
normal good
In economics, a normal good is a type of a Good (economics), 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 ...
.
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. 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. It suggests that as family income increases, the percentage spent on food decreases, even though the total amount of food expenditure increases. Expendit ...
, 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 ...
. 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, after which the stock exchange decreases the price of the stock by the dividend to remove volatility. The market has no control over the stock price on open on the ex ...
and stable
earnings {{Short description, Financial term
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 u ...
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 Co ...
*
Income elasticity of demand
In economics, the income elasticity of demand (YED) 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 ...
*
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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