Outcomes

Explain and illustrate:

the price-consumption curve
the effect of a change in price and a change in
income on the consumers equilibrium for both a
normal and inferior product
the income-consumption curve
How the income and substitution effect can be used
to explain consumers reaction on price sensitive and
non-price sensitive products.
Engel curves for different products

The Effect of Changes in Price

Price-consumption curve (PCC): for a
good X is the set of optimal bundles traced
on an indifference map as the price of X
varies (holding income and the price of Y
constant).
Purpose: used to derive demand curve

Figure 4.1: The Price-Consumption

Curve

Figure 4.2: An Individual Consumers

Demand Curve

The Effects of Changes in Income

Income-consumption curve (ICC): for a
good X is the set of optimal bundles traced
on an indifference map as income varies
(holding the prices of X and Y constant).
Engel curve: curve that plots the
relationship between the optimal quantity of
X consumed and income.
- Normal product: one whose quantity demanded rises as
income rises.
- Inferior product: one whose quantity demanded falls as
income rises

The Effects of Changes in

Income
Normal good: one whose quantity
demanded rises as income rises.
Inferior good: one whose quantity
demanded falls as income rises.

Figure 4.3: An Income-Consumption

Curve

Figure 4.4: An Individual Consumers

Engel Curve

Figure 4.31: Engel Curves for Different

Types of Goods
Average Income (R/wk)

Average Income (R/wk)

10

Engel curves

Difference between products:

Normal products
Luxury products positive slope + elastic
(flatter)
Necessities positive slope + inelatic
(steeper)
Inferior products negative slope

Income and Substitution Effects

Substitution effect: that component of the total
effect of a price change that results from the
associated change in the relative attractiveness
of other goods.
Income effect: that component of the total effect
of a price change that results from the
associated change in real purchasing power.
Total effect: the sum of the substitution and
income effects.
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Figure 4.6: The Total Effect

of a Price Increase

13

Figure 4.7: The Substitution and Income Effects

of a Price Change for a Normal Good

14

Figure 4.8: Income and Substitution

Effects for an Inferior Good

15

Consumers reaction on price

changes
Consumers react differently on price
changes
Elastic vs inelastic products
Inelastic salt
Elastic accomodation

How can we use the IE and SE to explain

the reactions?
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Figure 4.12: Income and Substitution

Effects of a Price Increase for Salt
Y (R/mo)

Y (R/mo)

0.5 0.5002
0.5001

1 500

3 000

Salt (kg/mo)

Salt (kg/mo)
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Figure 4.13: Income and Substitution

Effects for a Price-Sensitive Good
Y (R/wk)

18

Figure 4.31: Engel Curves for Different

Types of Goods
Average Income (R/wk)

Average Income (R/wk)

23

Engel curves

Difference between products:

Normal products
Luxury products positive slope + elastic
(flatter)
Necessities positive slope + inelatic
(steeper)
Inferior products negative slope