Department of Business Economics

BEC 1370 Microeconomics

Year I - Semester II (2022)
Session 06
THEORY OF CONSUMER BEHAVIOUR (PART V)
Effects of Changes in Money Income and Prices on Consumer Equilibrium
&
Derivation of an Individual’s Demand Curve

1
Lecture Outline

•Income Consumption Curve

•Engle Curve
•Price Consumption Curve
•Derivation of an Individual’s Demand Curve

2
Effects of Changes in Money Income

Income Consumption Curve (ICC)

Income consumption curve connects the consumer equilibrium
bundles of two commodities at different income levels when
prices of the two commodities remain constant.

When deriving ICC,

- income of the consumer changes BUT
- prices of two commodities remain constant

3
ICC for a Normal Good
Normal goods are those which consumption increases when income
increases.
ICC for such goods is positively sloped.
 ICC for an Inferior Good
Inferior goods are those which consumption decreases when income increases.
ICC for inferior goods turns backward and become negatively sloped.
QY per Time Period
ICC
B4

B3 E4 B1 < B2 < B3 < B4

B2
U4
B1 E3

E2
U3
E1

U1 U2
0 QX4 QX1 QX2 QX3 QX per Time5Period
ICC for an Essential Good
The consumption is independent from the income after a certain level of
income.

ICC B1 < B2 < B3 < B4

QY per Time Period
B4

B3 E4
U4
B2 E3
U3
B1
E2
E1 U2

U1
0 QX1 QX2 QX per Time Period
6
ICC for a Compulsory Good
The consumption of a good is independent from the income.

ICC

QY per Time Period

B4
B1 < B2 < B3 < B4
B3

B2 E4

B1 E3 U4

E2 U3

E1 U2

U1
0 QX QX per Time Period

7
Income Consumption Curve and Engle Curve
ICC can be used to derive the Engle Curve.

It is important for studies of family expenditure patterns.

Engle curve shows how many units of a good are consumed at

different income levels.

8
Engle Curve
The shape of a consumer’s Engle Curve for a particular good
will depend on the,
• nature of the good
• the nature of the consumer’s preference, and
• the level at which commodity prices are held constant.

The shape of an Engle Curve indicates the responsiveness of

quantity demanded of a good or service to changes in
consumer income.

9
Engle Curve for a Normal Good

Normal goods are those which consumption increases when income

increases.

10
Engle Curve for an Inferior Good

Inferior goods are those which consumption decreases when income

increases.

Engle Curve
Money Income per Time Period

I2

I1

0 QX1 QX2
QX per Time Period

11
Engle Curves for Essential and Compulsory Goods

Essential Good Compulsory Good

Engle Curve Engle Curve

Money Income per Time Period

0
QX per Time Period Money Income per Time Period 0 QX per Time Period

12
Price Consumption Curve and the Derivation of an
Individual’s Demand Curve
The Price Consumption Curve (PCC) is a graph that connects points of
consumer equilibrium as price changes.
When deriving PCC,
- prices of one commodity changes BUT
- price of the other commodity AND
- income of the consumer remains constant.

The Demand Curve can be derived from PCC by allowing the price of a
good to vary as income, prices of other good and preference are held
constant.

13
PCC and Derivation
of Individual
Demand Curve
For illustrative purposes,
assumed a reduction in
price of X.
B1: When PX = Rs. 12
B2: When PX = Rs. 8
B3: When PX = Rs. 6

Price per Unit QX per Time

(Rs.) Period
12 20
8 30
6 35

14
Thank You