Which terms are used to characterize essential goods and luxury goods in terms of income elasticity?

The correct answer highlights how essential goods and luxury goods are characterized in terms of income elasticity. Income elasticity of demand measures how the quantity demanded of a good responds to changes in consumer income.

Essential goods, which are necessary for basic needs (like food and basic clothing), tend to have low-income elasticity, meaning they are considered income inelastic. This indicates that when consumer incomes rise or fall, the quantity demanded for these goods does not change significantly. People need these goods regardless of their income level, which is why they are termed income inelastic.

Conversely, luxury goods, which are not necessary but desired for their inherent quality or prestige, have high-income elasticity and are classified as income elastic. For these goods, demand increases significantly as consumer incomes rise, reflecting that as people have more disposable income, they tend to spend more on luxury items.

Understanding this distinction is vital in economics, as it helps analyze consumer behavior and market trends based on economic changes. The other terms in the choices provided do not accurately encapsulate the economic concepts of responsiveness in demand concerning income changes, which is why they do not fit the context of income elasticity as clearly as the correct answer does.