Income Effect Indifference Curve

Each point on an orange curve known as an indifference curve gives consumers the same level of utility.

Income effect indifference curve. X 2 involved a change in the marginal rate of substitution i e. Hick s income effect discussed in this section explains the logic and process of decision making by the consumer to arrive at optimal decision as a response to income changes. An income effect represents change in consumer s optimal consumption combination on account of change in her his income and thereby changes in her his quantity purchased prices of goods x p x and y p y remaining unchanged. Indifference curves are heuristic devices used in contemporary microeconomics to demonstrate consumer preference and the limitations of a budget.

X 1 to pt. The movement from pt. In case of a normal good i e. The income effect arises because at the increased price of movies the consumer feels less rich.

This is different from a change in income which only involves one change a change in utility. Economists have adopted the principles of. The icc curve shows the income effect of changes in consumer s income on the purchases of the two goods given their relative prices. Analyzing the income effect using an indifference map the graph above is known as an indifference map.

A change in the slope of the indifference curve and a change in utility i e. The income effect is the movement from point c to b which shows how ogden reacts to a reduction in his buying power from the higher indifference curve to the lower indifference curve but holding constant the relative prices because the dashed line has the same slope as the new budget constraint. Now suppose that income of the consumer increases. Thus the income effect means the change in consumer s purchases of the goods as a result of a change in his money income.

A good whose quantity demanded increases with increase in income the substitution effect and the income effect reinforce each other i e. In term of indifference curves analysis just as the price effect an income effect measures consumer s movement from one optimal consumption combination to another on her his indifference map as a result of change in the income. Movement of the consumer from q on indifference curve ic to s on higher indifference curve ic 2 along the income consumption curve is the result of income effect of the price change. Income effect is illustrated in fig.

Normal good vs inferior good. They work in the same direction. The income effect equals the difference between quantity demanded of movies at point s and point n. Normally when the income of the consumer increases he purchases larger quantities of two goods.

Income and substitution effects. But the consumer will not be finally in equilibrium at s. A change from the blue indifference curve to the pink indifference curve. It means that the increase in real income or purchasing power of the consumer as a result of the fall in price of x is equal to pa in terms of y or l x b in terms of x.