chapter 5.2

• Effect of Income Changes on the Budget Line:

  • When your income increases, you can afford more of both goods (meals and films). So, your budget line shifts outward, meaning you can buy more.
  • The new budget line is still parallel to the old one because the prices of the goods haven’t changed—only your income has.
• Normal Goods: If you buy more of a good when your income increases, it’s called a normal good.

  The more you earn, the more you’ll want to spend on things that give you more satisfaction, like luxury items
• Inferior Goods: If you buy less of a good when your income increases, it’s called an inferior good.

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  • As your income rises, you demand fewer of these goods because you can afford better alternatives.
• Income Elasticity:

  • Income Elasticity of Demand measures how sensitive the quantity demanded of a good is to changes in income.
  • If income elasticity is greater than 1, the good is a luxury (you buy much more when income rises, like films).
  • If it’s positive but less than 1, the good is a necessity (you buy a bit more as income rises, like food).
  • If it’s negative, it’s an inferior good (you buy less of it as income increases).
• The Income Expansion Path shows how the combination of goods you buy changes as your income changes, holding prices constant.
• The Engel Curve is a graph that shows the relationship between how much of a good you buy and your income level.
• For normal goods, the Engel curve slopes upward because as your income increases, you buy more of the good.
• • For inferior goods, the Engel curve bends backward, meaning that at higher income levels, you buy less of that good.
• • Budget Line: Shows all the combinations of goods you can afford with your current income.
  • Indifference Curve: Shows all the combinations of goods that give you the same level of happiness. A higher indifference curve means more happiness.
  • Marginal Rate of Substitution: How much of one good you're willing to give up for another while keeping your happiness the same.
  • Income Expansion Path: Tracks how the combination of goods you buy changes as your income changes.
  • Engel Curve: Shows the relationship between your income and how much of a good you consume.
• Veblen goods are a type of luxury good where demand increases as the price increases, which is the opposite of normal goods.
• Giffen goods are a rare type of inferior good where an increase in the price leads to an increase in the quantity demanded.
• • If a consumer’s income increases 
  • The budget line will shift outwards 
  • The new end points show the increase in purchasing power if only one good is purchased 
  • Since prices have not changed the slope remains unaltered 
• • To find the new budget line we calculate the new endpoints with the new budget 
  • Consumers choose the point on the budget line that is tangent to the highest achievable indifference curve 
• • The difference between the income change & the change in quantity of the good will indicate income elasticity 
• • Tastes can make normal goods inferior goods in terms of indifference graphs 
• An increase in income reduces demand for the inferior good 
• Effects of a fall in income : 

  • Budget line shifts inwards but remains parallel to the original budget line 
  • When both goods are normal : lower income reduces quantity demanded for both goods 
  • When one good is inferior : quantity demanded for that good rises
  • It is impossible for both goods to be inferior 
  • When income falls but prices remain unchanged it is not feasible for the consumer to consume more of both goods
• Goods on sale are inferior goods since their demand increases as income decreases 
• The income expansion path shows:

  How the chosen bundle of goods varies with consumer income levels, keeping constant everything else.

  Shows the response of demand to income in relation to all possible variations of income 
• the income expansion path is the same as the income consumption path
• Process:

  • Draw different budget lines 
  • If your income increases, we draw more budget lines higher up. These new lines show what a person can afford with more money
  • We look at points where the person chooses what to buy
  • By connecting these points, we create the "income expansion path."
• the income consumption path : The path helps us understand how people change what they buy when they earn more money.
• The Engel curve shows how much of a good you buy as your income changes, assuming the price of the good stays the same.

  • The relationship between the quantity consumed of a good by their consumer and their income keeping the price of a good the same
• engel curves:It shows how much of one specific good you buy as your income increases.

  It focuses on the relationship between income and the quantity of one good you buy, keeping the price of that good constant.

  It only looks at one good as your income changes.
• income consumption / expansion paths:

  It shows how a person’s choices of multiple goods (usually two)  change as their income increases.

  It traces the combination of goods a consumer buys at different income levels, keeping prices constant.

  It shows the relationship between income and multiple goods (how much of different goods you buy with more income).
• the Engel curve for a normal good slopes upward. This means that as your income increases, you buy more of that good.
• inferior good is something you buy less of when you earn more
• The Engel curve for an inferior good might bend backward. This means you buy more of it at first, but