Page 85 - DECO401_MICROECONOMIC_THEORY_ENGLISH

Microeconomic Theory

Notes scroll to the right above the budget line CD is IC on the E curve touches the point. The two budget lines are
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parallel which show the equal value of both the products. The demand of inferior product X drops from OM
to ON as the income of consumer increases. Thus the demand of inferior products is lessen by the increase
in income of consumer. The Income Consumption Curve which creates by meeting the various equilibrium
points E and E is backwards sloping to the left. This represents the negative income effect.
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This is known by the ICC of Fig. 4.39 that product X is an inferior product. This curve is folded backward
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to point B which represents the lower amount of product X will buy if income of consumer increases.
The curve ICC shows that product Y is an inferior product. This curve is folded downward to point A
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which means the lower amount of product Y will buy if income of consumer increases.

The budget line is the line which represents the various combinations of two
products.

4.34 Engel’s Curve

The Income Consumption Curve can be used to identify the relation between the optimum quantity
of every product and income level. The German economist of 19th century Ernest Engel was the first
person to clarify this by the help of a curve. So this curve is called Engel’s Curve. An Engel Curve is
a curve which shows optimum quantity of a commodity purchased at different levels of income.
Engel’s Curve is not equal to Income Consumption Curve. Income Consumption Curve represents the
combination of various products on various levels of income, while the prices are stable. While Engel’s
Curve indicates how much quantity of a commodity a consumer will consume at different levels of
his income in order to be in equilibrium. This curve is important to study the family expenditure and
applied studies of economic welfare. Engel’s Curve can be drawn by Income Consumption Curve.

Fig. 4.39

Y

Commodity Y B A

ICC
2

O X
Commodity X

What is the Difference between Engel’s Curve, Income and Consumption Curve?
Income Consumption Curve represents the changes of consumption of product X and Y if the income of consumer rises.
But Engel’s curve represents the relation of consumption of quantity of a unique product and income of consumer.

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