David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

CHAPTER 5 Consumer choice and demand decisions
8
II) 7
.5 6
ii: 5
4
3
2
1
0 2 4 6 8
Meals
F'
12 14 16 QM
Again, income is increased from £50 to £80 and there
is a parallel shift in the budget line from AF to A'F'. If
meals were an inferior good, the quantity demanded
would fall as income rises. The consumer then moves
from C to C' when income rises.
Figure 5.10 An increase in income reduces
demand for the inferior good
y
Figure 5.11
goods
Income expansion path for normal
x
To find the exact position of this new line, we again
calculate the end-points at which all income is spent
on a single good. Point A shows that £80 buys at most
8 films at £10 each. Point F shows that £80 buys at
most 16 meals at £5 each. Joining these points yields
the new budget line A'F'. Since the slope of a budget line
depends only on the relative price of the two goods,
which is unchanged, the new budget line A' F' is parallel
to the old budget line AF. Which point on A'F'will the
student choose? She chooses C', at which the new budget
line is tangent to the highest attainable indifference
curve. However, the position of C' depends on the map
of indifference curves that describe her tastes.
For most consumers, food is a normal good but a
necessity, whereas films are a luxury. Figure 5.9 shows
the case in which her tastes have these properties.
A rise in income from £50 to £80 moves her from C
(2 films, 6 meals) to C' (4 films, 8 meals). Thus, a
60 per cent rise in income induces a 100 per cent
increase in the quantity of films demanded, confirming
that films are a luxury good with income elasticity in
excess of unity. Similarly, the 60 per cent rise in income
induces a 33 per cent increase in the quantity of
meals demanded. The income elasticity of demand for
food is (0.33/0.6) = 0.55, confirming that food is a
normal good (income elasticity greater than zero)
but a necessity (income elasticity less than unity).
In contrast, in Figure 5.10 her tastes make food an
inferior good, for which the quantity demanded declines
as income rises. At point C' on the budget line A'F',
fewer meals are demanded than at point C on the
budget line AF, corresponding to the lower income.
The effects of a fall in income are, of course, exactly
the opposite. The budget line shifts inwards but remains
parallel to the original budget line. When both goods
are normal, lower consumer income reduces the
quantity demanded for both goods. If one good is
inferior, the quantity demanded will actually rise if
income falls. Notice that both goods cannot be inferior:
when income falls but prices remain unchanged it
cannot be feasible for the consumer to consume more
of both goods.
The income expansion
path shows how the chosen
bundle of goods varies with
consumer income levels,
keeping constant everything
else.
Income expansion paths
Instead of the response of demand to a particular change in income, we might
want to know the response of demand to income in relation to all possible
variations in income. To study this, we trace out the income expansion path. Look
again at Figure 5.9. The budget lines AF and A'F' correspond to incomes of £50
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