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This lesson explains the Positive Income Effect and Negative Income Effect. in addition it also explains the Income Consumption Curve for Normal Goods and Inferior Goods. It is important for the microeconomics students. It is relevant for the courses like BBA, Economics hons, for the graduation and post graduation level and for competitive exams like CUET Economics, IAS economics optional, Indian Economic Service and the NET JRF Economics aspirants.

Income Effect means the change in consumer’s purchases of the goods as a result of a change in his money income. As the consumer’s income increases, he switches to a higher Indifference Curve and as a consequence enjoys a higher level of satisfaction.

Income Consumption Curve: It is the location of equilibrium points at various levels of consumer income. It takes out the income effect on the quantity consumed of the goods.

There can be positive income effect and negative income effect

Positive Income Effect : When income increases, the consumption of the good increases. This is the normal case. So, when the income effect is positive for both the goods, Income consumption curve will be upward sloping towards the right.
Negative Income Effect: Income effect is negative when with the increase in income, the consumption of the good reduces. Such goods are called inferior goods. As income increases, consumers purchase superior goods and reduce inferior goods.

Case 1: Good X being Inferior Goods and Good Y being Normal good: As income increases, consumption of good X reduces and consumption of good Y increases.

Case 2: Good Y being Inferior good, Good X being Normal Good : As income increases, consumption of Good Y reduces and consumption of Good X increases.

It is to be noted that the income effect becomes negative only after a point. It signifies that only at higher ranges of income, some goods become inferior goods and up to a point their consumption behaves like normal goods.

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