The income-consumption curve or income expansion path is the set of optimal consumer combinations, which are obtained by varying their income levels and keeping the prices of goods constant.
That is, how a consumer's choice changes when their income changes and prices are maintained. The consumption income curve responds to a question of the type: If my income falls from 100 to 50 and prices remain the same, will my choice of consumption change? Graphically it is represented as follows:
Where A is a good and B is another good. The red lines are the budget constraints. P1 is the price of good A and p2 is the price of good B. R represents income. Thus, since p1 and p2 remain constant, the higher the value of R, the more quantity of each good it can consume. R2 is greater than R1, and R1 is greater than R0. The black line that joins the optimal points is the income-consumption curve.
Normal goods and inferior goods
Taking into account the variations that occur in the quantities that are consumed of each good in the face of changes in the consumer's income, the goods can be classified differently. On the one hand, we find the normal goods. And, on the other, with inferior goods.
- Normal good: A good is normal if its consumption decreases in the face of decreases in income, keeping prices constant. In the same way, a good is normal if its consumption increases in the face of increases in income, keeping prices constant.
- Inferior good: A good is inferior if its consumption increases in the face of decreases in income, keeping prices constant. The same occurs in reverse, a good is inferior if its consumption decreases in the face of increases in income, keeping prices constant.
If the goods are normal then the income-consumption curve slopes upward. Whereas if one of the goods is lower, then the slope is negative.
Through the income-consumption curve, the Engel curves can be extracted for each of the goods. The Engel curve shows us how the demand for a good varies in the face of a change in income, considering that the prices of the goods remain constant.
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