income expansion path

# income expansion path - Econ 11 7a Income Expansion Path...

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Econ 11 Hoi Ling Chin/ 7a: Income Expansion Path The income expansion path (also called income consumption curve, IEP) is a graph that shows how different income affects consumption of two different products. To find the income expansion path, you find the consumer's optimum of each budget constraint and draw a curve to connect the consumer's optimums together. Figure 7.a.1 shows an example of an income expansion path. The budget constraint is a graph shows how income is divided between two products. Any point below that line is within a person's budget and therefore is affordable. Any point above the line is not affordable since it exceeds a persons income. The consumer's optimum is the point when the slope of the budget constraint is equal to the slope of the indifference curve. Figure 7.a.1 shows that when the income is \$50, the person can afford 50 units of Y and 25 units of X. Therefore the budget constraint intercepts Y at 50 and X at 25. Similarly for an income of \$100 where the

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income expansion path - Econ 11 7a Income Expansion Path...

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