|Learning Objective |
To explain the derivation of income consumption and Engel curve for a normal and inferior good
This issue deals with the impact of change in income on the quantity demanded of good measured along the x-axis (generally quantity demanded of good X). If we hold all the prices of goods constant and increase in the consumer’s budget or money income, the budget line will shift outward in a parallel manner. With an increase in consumer’s income, the parallelly shifted budget line will tangent at a point on the upper indifference curve and consumer attains equilibrium accordingly. At equilibrium on the higher indifference curve shows a higher quantity of both goods if both of the goods are a normal good. Similarly, if the good is inferior then the demand for such good would decrease at the equilibrium point on the upper indifference curve. Here, we derive the income consumption curve and income demand curve or Engel curve based on the income consumption curve.
With the change in income of the consumer, the consumer’s equilibrium point will also change and if we join all the optimal consumption points at a different level of income, assuming the prices remain the same, we get the curve and known as the income consumption curve (ICC). ICC is upward sloping in the case of normal goods and backward and downward bending in case of an inferior good. In the case of upward sloping ICC or case of a normal good, the income demand curve or the Engel curve is upward sloping or positively sloped. Similarly, in the case of an inferior good or backward/downward bending income consumption curve, the income-demand curve or the Engel curve is negatively sloped or downward sloping.
For the detailed explanation of the derivation of upward/positively sloping and downward/negatively sloping income-demand curve or the Engel curve (Engel curve for a normal good and for an inferior good respectively), please click here.