Introduction
In consumer theory, the Income Consumption Curve (ICC) is an important tool that shows how a consumer’s demand for goods changes as their income changes, keeping prices constant. It helps us understand the relationship between income and consumption patterns. For different types of goods—normal or inferior—the ICC behaves differently. In this answer, we’ll define the Income Consumption Curve and explain how it appears in the case of an inferior good.
What is an Income Consumption Curve?
The Income Consumption Curve is a curve that connects all points of consumer equilibrium when income changes but the prices of goods remain unchanged. Each point on the curve represents the optimal combination of two goods that a consumer chooses at different levels of income.
Key Features of ICC
- Shows how consumption choices change with income
- Derived from a set of indifference curves and budget lines
- The slope of ICC depends on the nature of goods (normal or inferior)
Normal Goods vs Inferior Goods
- Normal Good: Demand increases with an increase in income
- Inferior Good: Demand decreases as income increases
Income Consumption Curve for an Inferior Good
When a good is inferior, the consumer buys less of it as their income rises. This affects the shape of the ICC.
Diagram Description:
- X-axis: Quantity of Good X (assumed to be inferior)
- Y-axis: Quantity of Good Y (normal good)
- Initially, as income increases, the consumer buys more of both goods, and the ICC slopes upward.
- Beyond a point, the consumer starts buying less of Good X (inferior good) and more of Good Y (normal good).
- This causes the ICC to bend backward towards the Y-axis.
Result:
The Income Consumption Curve for an inferior good bends backward, indicating that after a certain income level, the consumer substitutes away from the inferior good in favour of the superior (normal) good.
Example:
Suppose rice is an inferior good for a consumer. When income is low, they buy a lot of rice. As income increases, they switch to wheat or more expensive food items. Therefore, rice consumption falls with rising income, while wheat consumption increases. This behaviour is captured by the ICC.
Conclusion
The Income Consumption Curve helps explain how consumers adjust their spending as income changes. In the case of inferior goods, the ICC bends backward, showing a decrease in demand for that good after a certain income level. This concept is important for understanding consumer behaviour and demand forecasting in economics.