Page 84 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Unit-4: Ordinal Utility Theory: Indifference Curve Approach

Notes
Fig. 4.36 Fig. 4.37

Y Y
ICC
2
ICC
C ICC
Oranges A Commodity Y ICC 1

E
E 1 IC
E 1
E IC
2 IC
2
O X
FB D O X
Apples Commodity X

2. Negative slope of Income Consumption Curve in case of Inferior Goods: The inferior goods are
those which are in less demand when the income of consumer rises and vice versa. The income effect
is negative for the inferior products. It means if the income of consumer increases then he buys less
the inferior products.

Income Consumption Curve is the curve which represents the equilibrium points on
various income levels and stable price.

Figure 4.38 represents the income effect of inferior goods. Let’s assume that product X represents inferior
goods and product Y represents general goods. The indifference curve IC touches the point E on the base
of budge line AB which draws on given income of consumer and the price of both the products. So the
consumer is in equilibrium on this point. As soon as the income of consumer increases, this budget line

Fig. 4.38

Y

C
ICC
Commodity Y E 1 IC 1
A

E
IC
O X
N M B D

LOVELY PROFESSIONAL UNIVERSITY 77