Question

Define the income consumption curve. Analyse the shape of the income consumption curve for a normal good and an inferior good.

Short answer

Answer: The main difference between the income consumption curve for normal goods and inferior goods lies in their slope. For normal goods, the income consumption curve has an upward slope, indicating a positive relationship between income and consumption, as consumers tend to consume more of the good when their income increases. On the other hand, for inferior goods, the income consumption curve has a downward slope, indicating a negative relationship between income and consumption, as consumers tend to consume less of the good when their income increases.

Step-by-step solution

Define the Income Consumption Curve

The income consumption curve (ICC) is a graphical representation of the relationship between an individual's income and their consumption of a good or service. It reflects the various quantities of goods that a consumer would buy at different income levels, while the prices of goods remain constant. The various points on the income consumption curve show the combinations of goods that provide the consumer with the highest level of satisfaction or utility at each income level.

Analyze the Income Consumption Curve for a Normal Good

A normal good is a type of good whose demand increases with an increase in consumer's income. In other words, when a person's income increases, they are more likely to consume more of a normal good compared to when their income is lower. For a normal good, the income consumption curve will have an upward slope. This is because as income increases, the consumer will purchase more of the good which leads to an increase in consumption. The income consumption curve for a normal good can be represented graphically by plotting the quantity of the good consumed on the x-axis and the income on the y-axis. As income increases, the curve will rise, indicating a positive relationship between income and consumption.

Analyze the Income Consumption Curve for an Inferior Good

An inferior good is a type of good whose demand decreases with an increase in consumer's income. In other words, when a person's income increases, they are more likely to consume less of an inferior good compared to when their income is lower. For an inferior good, the income consumption curve will have a downward slope. This is because as income increases, the consumer will purchase less of the good which leads to a decrease in consumption. The income consumption curve for an inferior good can be represented graphically by plotting the quantity of the good consumed on the x-axis and the income on the y-axis. As income increases, the curve will fall, indicating a negative relationship between income and consumption.