Income Effect Under Indifference Curve

If we now join t1 t2 and t3 it forms a curve known as income consumption curve icc.

Income effect under indifference curve. The sum of the two effects to be very small. Thus the movement form q to r due to price effect can be regarded as having been taken place into two steps first from q to s as a result of substitution effect and second from s to r as a result of income effect. Indifference curves only describe or illustrate the inferior good phenomenon. The icc shows the new equilibrium position of the consumer where there is a change in income with prices remaining constant.

The inferior good s large income effect moves in the opposite direction of the substitution effect causing the overall change i e. Types of income effect. The movement from s on a lower indifference curve to r on a higher indifference curve is the result of income effect. There are two types of income effect.

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. In other words indifference curves do not explain why income effect for a good is negative.