96 EFFECTS OF CHANGE IN INCOME ON CONSUMER DEMAND Generally it is observed that

96 effects of change in income on consumer demand

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9.6 EFFECTS OF CHANGE IN INCOME ON CONSUMER DEMAND Generally, it is observed that the income of consumer change the quantity demanded by a consumer. Assuming, other things remaining the same; when a consumer's income changes, his capacity to buy goods and services changes too, these changes may be shown by a parallel upward or downward shift in the consumer's budget line. As shown in Figure 9.7, when a consumer’s income decreases, his budget line shifts downward and when his income increases, the budget line shifts upward. With the changes in his income, the consumer moves from one equilibrium point to another. Such movements show the rise and fall in the consumption basket. This is called, "income effect"; illustrated in Figure 9.9. Figure 9.9: Income consumption curve of normal goods
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214 The indifference curves IC 1 , IC 2 , IC 3 and IC 4 represent the consumer's indifference map. To analyse the effect of change in income on consumption, let us suppose that the consumer has a given income and prices of goods X and Y are given and his budget line is given by AJ, and that the consumer is initially in equilibrium at E 1 on the IC 1 . Now let the consumer's income increase so that his budget line shifts from position AJ to BK and the consumer reaches a new equilibrium point, E 2 on IC 2 . Similarly, if his income increases further, he moves from equilibrium E 2 to E 3 and then to E 4 . Thus, with each successive upward shift in the budget line, the equilibrium position of the consumer moves upward. The successive equilibrium combinations of goods (X and Y) at four different levels of income are indicated by points E 1 , E 2 , E 3 and E 4 in Figure 9.9. If these points of equilibrium are joined by a curve, we, get the path of increase in consumption resulting from the increase in income. Tl1is curve is called the income consumption curve (lCC). The income-consumption curve may be defined as the locus of points representing various equilibrium quantities of two commodities consumed by a consumer at different levels of income, all other things remaining constant. The movement from point E 1 , towards point E 4 indicates increase in the consumption of the normal goods X and Y. This is called income effect. 9.6.1 Income-Effect on Inferior Goods The income-effect on the consumption of different kinds of commodities is not uniform. It can be positive or negative or even neutral. Whether-the income effect is positive or negative depends on the nature of a commodity. In case of normal goods, income-effect is positive and in case of inferior goods, it is negative. By
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215 definition, an inferior good is one whose consumption decreases when income increases. In Figure 9.9, consumption of both the commodities, X and Y, increases with an increase in the consumer's income. Therefore, the income-effect on both X and Y is positive. Figure 9.10 (a) and (b) present the case of negative income effect. In Figure 9.10 (a), X is an inferior good; its consumption decrease when consumer's income increases. The income-effect on consumption of X is, therefore, negative. Similarly, in Fig. 9.10 (b), income-effect on Y is negative as
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