Individual and Market Demand 3

Effects of Income Changes Clothing (units per month) An increase in income, with the prices fixed, causes consumers to alter their choice of market basket. 7 D 5 Income-Consumption Curve U3 U2 B 3 A 4 U1 10 16 Food (units per month) Effects of Income Changes Price of food An increase in income, with the prices fixed, shifts the consumer’s demand curve to the right. Points E, G and H correspond to A, B, and D on the previous graph respectively. E $1.00 D1 4 10 16 Food (units per month) Effects of Income Changes Price of food E $1.00 An increase in income, with the prices fixed, shifts the consumer’s demand curve to the right. Points E, G and H correspond to A, B, and D on the previous graph respectively. G D2 D1 4 10 16 Food (units per month) Effects of Income Changes Price of food E $1.00 G An increase in income, with the prices fixed, shifts the consumer’s demand curve to the right. Points E, G and H correspond to A, B, and D on the previous graph respectively. H D3 D2 D1 4 10 16 Food (units per month) Individual Demand  Income Changes • The income-consumption curve traces out the utility-maximizing combinations of food and clothing associated with every income level. Individual Demand  Income Changes • An increase in income shifts the budget line to the right, increasing consumption along the income-consumption curve. • Simultaneously, the increase in income shifts the demand curve to the right. Individual Demand  Income Changes • If the income-consumption curve has a positive slope, the quantity demanded increases with income and the income elasticity of demand is positive. • The good is a normal good. Individual Demand  Income Changes • If the income-consumption curve has a negative slope, the quantity demanded decreases with income and the income elasticity of demand is negative. • The good is an inferior good. An Inferior Good Steak 15 (units per month) 10 5 5 10 20 30 Hamburger (units per month) An Inferior Good Steak 15 (units per month) 10 5 A U1 5 10 20 30 Hamburger (units per month)