Income Effect With Indifference Curve

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

Income effect with indifference curve. The change due to income is therefore b to c q2 to q1 in this case of a normal good the income and substitution effect reinforce each other both leading to lower demand. X 1 to pt. This is different from a change in income which only involves one change a change in. 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.

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. A noteworthy point is that it is not the indifference curves which explain why a good happens to be an inferior good. X 2 involved a change in the marginal rate of substitution i e. Indifference curves can only illustrate the inferior good phenomenon.

The movement from s on a lower indifference curve to r on a higher indifference curve is the result of income effect. However income has fallen causing the consumer to choose from a lower indifference curve i2. The movement from pt. 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.

A change in the slope of the indifference curve and a change in utility i e.