Normal Goods and Inferior Goods

Normal Goods: Normal goods are those goods for which demand increases with a rise in income and vice versa.

Restaurant meals can be considered among normal goods. This is because as the income of a person increases, he/she eats more in the restaurant.
Branded clothing is also another example of normal goods because as the income of a person increases, people tend to buy more branded clothing.

The demand and income of normal goods are positively correlated. As the income of a person increases, demand for normal goods increases. The Income-demand curve has a positive slope i.e., Income Elasticity of Demand is positive for Normal goods. The curve is as shown below:

Substitution effect and Income effect play a role in determining the demand for normal goods.

Substitution Effect: For normal goods, a decrease in price results in greater demand for a particular item in place of other substitute goods.
Example: If the price of coffee decreases, people start consuming more coffee and less tea. Coffee and tea here are examples of normal goods that are substitutes for each other.
Income effect: As the price of normal goods decreases, this results in an increase in real income & purchasing power. So, people tend to buy more, leading to an increase in demand for normal goods.

In the case of Normal Goods, the Substitution Effect, and Income Effect reinforce each other. The substitution effect will lead to buying more at a lower price and buying less at a higher price. Income Effect also leads to buying more when the price is low and vice versa.
For normal goods, the Demand curve will be negatively sloped for both substitution and income effect.

Inferior Goods

Inferior Goods: Inferior Goods are those goods for which demand decreases with a rise in income and vice versa.

Staple food like millets can be considered as Inferior Goods. This is because as the income of a person increases, he/she starts consuming lesser millets and more of wheat.
Public transportation is also another example of Inferior Good because as the income of a person increases, people buy their own cars/bikes and useless public transport.

The demand and income of normal goods are negatively correlated. As the income of a person increases, demand for inferior goods decreases. The Income-demand curve has a negative slope for Inferior goods i.e., Income Elasticity of Demand is negative and is shown below:

Substitution effect and Income effect play a role in determining the demand for normal goods.

Substitution Effect: For inferior goods, a decrease in price results in greater demand for a particular item in place of other substitute goods.
Example: If the price of maize decreases, people start consuming more maize and lesser barley. Maize and barley here are examples of inferior goods that are substitutes for each other.
Income effect: As the price of inferior goods decreases, this results in an increase in real income & purchasing power. But the people buy less of inferior goods.

In the case of Inferior Goods, the Substitution Effect, and Income Effect work in the opposite direction of each other. The substitution effect will lead to buying more at a lower price and buying less at a higher price. But Income Effect leads to buying less when real income is more.

Normal goods or inferior goods do not tell anything about the quality of goods. Inferior Goods do not mean that they are poor in quality. It only means that consumers prefer less of inferior goods as their income rises. Similarly, normal goods do not mean that they are of better quality. It only means that consumers prefer more normal goods as their income rises.
There is no distinct division between Normal goods & Inferior Goods. An item that is among the normal goods for a middle-class person can be among inferior goods for a rich person.
Example: Middle-class people consider eating in McDonald's as normal goods, but for a rich family, it is among inferior goods as they prefer dining at lavish five-star restaurants.