The Income Consumption Curve

An increase or decrease in taxation.

The income consumption curve. With 0 α 1 and 0 β 1. For deriving engel curve from income consumption curve we plot level of income on the y axis and quantity purchased of a commodity on the x axis. Income effect can either be positive or negative. The income consumption curve is the set of tangency points of indifference curves with the various budget constraint lines with prices held constant as income increases shifting the budget constraint out.

Changes in income can be the result of many factors including. Kurva yang menggambarkan kombinasi produk yang dikonsumsi yang memberikan kepuasan utilitas maksimum kepada konsumen pada berbagai tingkat harga menggambarkan bagaimana konsumen bereaksi terhadap perubahan harga suatu barang sedangkan harga barang lain dan pendapatan tidak berubah. When consumption and savings priorities change. Income effect for a good is said to be positive when with the increase in income of the consumer his consumption of the good also increases.

This may be proved as follows. The curve obtained by connecting successive consumer s equilibrium points e 1 e 2 and e 3 in this case at various levels of money income of the consumer other things remaining unchanged is known as income consumption curve. This is the normal good case. The income consumption curve icc is upward sloping for normal goods.

It is plotted by connecting the points at which budget line corresponding to each income level touches the relevant highest indifference curve. An increase in the income with the prices of all goods fixed causes consumers to alter their choice of. Let s consider that both of the goods x and y are normal good and see the effect of change in income on the consumption decision with the help of the following diagram. Beyond this with the increase in income consumption increases but less than the increase in income and therefore consumption function curve cc lies below the 45 line oz beyond y 0.

Given the indifference map representing the preferences of a consumer and the prices of two goods x and y icc is the income consumption curve showing the equilibrium. Income effect and income consumption curve normal good case. Income consumption curve traces out the income effect on the quantity consumed of the goods. Consider panel a in fig.

As income increases consumption also increases and at the income level oy 0 consumption is equal to income. Price consumption curve pcc pcc disebut juga price expansion price karena menggambarkan perkembangan harga. Income consumption curve is a graph of combinations of two goods that maximize a consumer s satisfaction at different income levels. Whenever its income level changes a family moves to a different point on its original consumption curve.

The income consumption curve icc for cobb douglas production function is a straight line through the origin. The cobb douglas utility function is expressed as.