Income Effect When Price Increases

Low income earners mostly consume inferior goods which are less costly.

Income effect when price increases. The increase in the price of normal goods leads to a rise in demand for inferior goods. This is shown in figure 12 18. The price effect indicates the way the consumer s purchases of good x change when its price changes a given his income tastes and preferences and the price of good y. The price line will move outwards parallel to itself be coming say cd.

The equilibrium position of the consumer will now be s where cd touches another indifference curve ic 3. When the cost of standard good. If it is now gh the consumer will be at equilibrium at v. If the consumer s income increases he will be able to buy more x and y.

When nominal income increases without any change to prices this makes consumers able to purchase more goods at the same price and for most goods consumers will demand more. If the income increases again the price line will move further outwards. Suppose the price of x falls.