Consumers’ Behaviour

Why do you buy the goods and services you do? It must be because they provide
you with satisfaction—you feel better off because you have purchased them.
Economists call this satisfaction utility.

The concept of utility is an elusive one. A person who consumes a good such as
peaches gains utility from eating the peaches. But we cannot measure this utility
the same way we can measure a peach’s weight or calorie content. There is no
scale we can use to determine the quantity of utility a peach generates.

Francis Edgeworth, one of the most important contributors to the theory of

consumer behavior, imagined a device he called a hedonimeter (after hedonism,
the pursuit of pleasure):

“[L]et there be granted to the science of pleasure what is granted to the science
of energy; to imagine an ideally perfect instrument, a psychophysical machine,
continually registering the height of pleasure experienced by an individual….
From moment to moment the hedonimeter varies; the delicate index now
flickering with the flutter of passions, now steadied by intellectual activity, now
sunk whole hours in the neighborhood of zero, or momentarily springing up
towards infinity” (Edgeworth, F. Y., 1967).

Perhaps some day a hedonimeter will be invented. The utility it measures will not
be a characteristic of particular goods, but rather of each consumer’s reactions
to those goods. The utility of a peach exists not in the peach itself, but in the
preferences of the individual consuming the peach. One consumer may wax
ecstatic about a peach; another may say it tastes OK.

When we speak of maximizing utility, then, we are speaking of the maximization of

something we cannot measure. We assume, however, that each consumer acts as
if he or she can measure utility and arranges consumption so that the utility
gained is as high as possible.

Total Utility

If we could measure utility, total utility would be the number of units of utility that
a consumer gains from consuming a given quantity of a good, service, or activity
during a particular time period. The higher a consumer’s total utility, the greater
that consumer’s level of satisfaction.

Panel (a) of Figure 7.1 “Total Utility and Marginal Utility Curves” shows the total
utility Henry Higgins obtains from attending movies. In drawing his total utility
curve, we are imagining that he can measure his total utility. The total utility
curve shows that when Mr. Higgins attends no movies during a month, his total
utility from attending movies is zero. As he increases the number of movies he
sees, his total utility rises. When he consumes 1 movie, he obtains 36 units of
utility. When he consumes 4 movies, his total utility is 101. He achieves the
maximum level of utility possible, 115, by seeing 6 movies per month. Seeing a
seventh movie adds nothing to his total utility.

Figure 7.1 Total Utility and Marginal Utility Curves

Panel (a) shows Henry Higgins’s total utility curve for attending movies. It rises as
the number of movies increases, reaching a maximum of 115 units of utility at 6
movies per month. Marginal utility is shown in Panel (b); it is the slope of the total
utility curve. Because the slope of the total utility curve declines as the number of
movies increases, the marginal utility curve is downward sloping.

Mr. Higgins’s total utility rises at a decreasing rate. The rate of increase is given
by the slope of the total utility curve, which is reported in Panel (a) of Figure 7.1
“Total Utility and Marginal Utility Curves” as well. The slope of the curve between 0
movies and 1 movie is 36 because utility rises by this amount when Mr. Higgins
sees his first movie in the month. It is 28 between 1 and 2 movies, 22 between 2
and 3, and so on. The slope between 6 and 7 movies is zero; the total utility curve
between these two quantities is horizontal.

Marginal Utility

The amount by which total utility rises with consumption of an additional unit of
a good, service, or activity, all other things unchanged, is marginal utility. The
first movie Mr. Higgins sees increases his total utility by 36 units. Hence, the
marginal utility of the first movie is 36. The second increases his total utility by 28
units; its marginal utility is 28. The seventh movie does not increase his total
utility; its marginal utility is zero. Notice that in the table marginal utility is listed
between the columns for total utility because, similar to other marginal concepts,
marginal utility is the change in utility as we go from one quantity to the next. Mr.
Higgins’s marginal utility curve is plotted in Panel (b) of Figure 7.1 “Total Utility
and Marginal Utility Curves” The values for marginal utility are plotted midway
between the numbers of movies attended. The marginal utility curve is downward
sloping; it shows that Mr. Higgins’s marginal utility for movies declines as he
consumes more of them.

Mr. Higgins’s marginal utility from movies is typical of all goods and services.
Suppose that you are really thirsty and you decide to consume a soft drink.
Consuming the drink increases your utility, probably by a lot. Suppose now you
have another. That second drink probably increases your utility by less than the
first. A third would increase your utility by still less. This tendency of marginal
utility to decline beyond some level of consumption during a period is called the
law of diminishing marginal utility. This law implies that all goods and services
eventually will have downward-sloping marginal utility curves. It is the law that
lies behind the negatively sloped marginal benefit curve for consumer choices
that we examined in the chapter on markets, maximizers, and efficiency.

One way to think about this effect is to remember the last time you ate at an “all
you can eat” cafeteria-style restaurant. Did you eat only one type of food? Did
you consume food without limit? No, because of the law of diminishing marginal
utility. As you consumed more of one kind of food, its marginal utility fell. You
reached a point at which the marginal utility of another dish was greater, and
you switched to that. Eventually, there was no food whose marginal utility was
great enough to make it worth eating, and you stopped.

What if the law of diminishing marginal utility did not hold? That is, what would
life be like in a world of constant or increasing marginal utility? In your mind go
back to the cafeteria and imagine that you have rather unusual preferences:
Your favorite food is creamed spinach. You start with that because its marginal
utility is highest of all the choices before you in the cafeteria. As you eat more,
however, its marginal utility does not fall; it remains higher than the marginal
utility of any other option. Unless eating more creamed spinach somehow
increases your marginal utility for some other food, you will eat only creamed
spinach. And until you have reached the limit of your body’s capacity (or the
restaurant manager’s patience), you will not stop. Failure of marginal utility to
diminish would thus lead to extraordinary levels of consumption of a single good
to the exclusion of all others. Since we do not observe that happening, it seems
reasonable to assume that marginal utility falls beyond some level of
consumption.

Maximizing Utility

Economists assume that consumers behave in a manner consistent with the

maximization of utility. To see how consumers do that, we will put the marginal
decision rule to work. First, however, we must reckon with the fact that the ability
of consumers to purchase goods and services is limited by their budgets.
The Budget Constraint

The total utility curve in Figure 7.1 “Total Utility and Marginal Utility Curves” shows
that Mr. Higgins achieves the maximum total utility possible from movies when he
sees six of them each month. It is likely that his total utility curves for other goods
and services will have much the same shape, reaching a maximum at some level
of consumption. We assume that the goal of each consumer is to maximize total
utility. Does that mean a person will consume each good at a level that yields the
maximum utility possible?

The answer, in general, is no. Our consumption choices are constrained by the
income available to us and by the prices we must pay. Suppose, for example, that
Mr. Higgins can spend just $25 per month for entertainment and that the price of
going to see a movie is $5. To achieve the maximum total utility from movies, Mr.
Higgins would have to exceed his entertainment budget. Since we assume that he
cannot do that, Mr. Higgins must arrange his consumption so that his total
expenditures do not exceed his budget constraint: a restriction that total
spending cannot exceed the budget available.

Suppose that in addition to movies, Mr. Higgins enjoys concerts, and the average
price of a concert ticket is $10. He must select the number of movies he sees and
concerts he attends so that his monthly spending on the two goods does not
exceed his budget.

Individuals may, of course, choose to save or to borrow. When we allow this

possibility, we consider the budget constraint not just for a single period of time
but for several periods. For example, economists often examine budget
constraints over a consumer’s lifetime. A consumer may in some years save for
future consumption and in other years borrow on future income for present
consumption. Whatever the time period, a consumer’s spending will be
constrained by his or her budget.

To simplify our analysis, we shall assume that a consumer’s spending in any one
period is based on the budget available in that period. In this analysis consumers
neither save nor borrow. We could extend the analysis to cover several periods
and generate the same basic results that we shall establish using a single period.
We will also carry out our analysis by looking at the consumer’s choices about
buying only two goods. Again, the analysis could be extended to cover more
goods and the basic results would still hold.

Applying the Marginal Decision Rule

Because consumers can be expected to spend the budget they have, utility
maximization is a matter of arranging that spending to achieve the highest total
utility possible. If a consumer decides to spend more on one good, he or she
must spend less on another in order to satisfy the budget constraint.

The marginal decision rule states that an activity should be expanded if its
marginal benefit exceeds its marginal cost. The marginal benefit of this activity is
the utility gained by spending an additional $1 on the good. The marginal cost is
the utility lost by spending $1 less on another good.

How much utility is gained by spending another $1 on a good? It is the marginal

utility of the good divided by its price. The utility gained by spending an
additional dollar on good X, for example, is

This additional utility is the marginal benefit of spending another $1 on the good.

Suppose that the marginal utility of good X is 4 and that its price is $2. Then an
extra $1 spent on X buys 2 additional units of utility (MUX/PX=4/2=2). If the
marginal utility of good X is 1 and its price is $2, then an extra $1 spent on X buys
0.5 additional units of utility (MUX/PX=1/2=0.5).

The loss in utility from spending $1 less on another good or service is calculated
the same way: as the marginal utility divided by the price. The marginal cost to
the consumer of spending $1 less on a good is the loss of the additional utility
that could have been gained from spending that $1 on the good.

Suppose a consumer derives more utility by spending an additional $1 on good X

rather than on good Y:

Equation 7.1
The marginal benefit of shifting $1 from good Y to the consumption of good X
exceeds the marginal cost. In terms of utility, the gain from spending an
additional $1 on good X exceeds the loss in utility from spending $1 less on good
Y. The consumer can increase utility by shifting spending from Y to X.

As the consumer buys more of good X and less of good Y, however, the marginal
utilities of the two goods will change. The law of diminishing marginal utility tells
us that the marginal utility of good X will fall as the consumer consumes more of
it; the marginal utility of good Y will rise as the consumer consumes less of it. The
result is that the value of the left-hand side of Equation 7.1 will fall and the value
of the right-hand side will rise as the consumer shifts spending from Y to X. When
the two sides are equal, total utility will be maximized. In terms of the marginal
decision rule, the consumer will have achieved a solution at which the marginal
benefit of the activity (spending more on good X) is equal to the marginal cost:

Equation 7.2

We can extend this result to all goods and services a consumer uses. Utility
maximization requires that the ratio of marginal utility to price be equal for all of
them, as suggested in Equation 7.3:

Equation 7.3

Equation 7.3 states the utility-maximizing condition: Utility is maximized when

total outlays equal the budget available and when the ratios of marginal utilities
to prices are equal for all goods and services.

Consider, for example, the shopper introduced in the opening of this chapter. In
shifting from cookies to ice cream, the shopper must have felt that the marginal
utility of spending an additional dollar on ice cream exceeded the marginal
utility of spending an additional dollar on cookies. In terms of Equation 7.1, if
good X is ice cream and good Y is cookies, the shopper will have lowered the
value of the left-hand side of the equation and moved toward the utility-
maximizing condition, as expressed by Equation 7.1.

Indifference Curve Approach:

Utility is the ‘satisfaction’ we get from using, owning or doing something. It is what
allows us to choose between options. This can be plotted on a chart.

A preference function therefore assigns values to the ranking of a set of choices.

This is useful as it allows us to see consumer behaviour as a maximisation
problem: faced with a set of options and a budget constraint, we will choose what
satisfies us most. Utility functions are often expressed as U(x1,x2,x3…) which
means that U, our utility, is a function of the quantities of x1, x2 and so on. If A is a

basket of goods, and , then U(A)>U(B). That is, if we prefer A to B it is

because we derive greater utility from it.
Utility functions follow the same code of conduct, the same axioms, as
preferences, because they are simply numerical representations of them. That is,
they are transitive, complete, continuous and convex, for the same reasons.
Being continuous allows us to differentiate them, and being insatiable allows us
to say that:

This means that the more, the better, which is the same as saying that utility
functions grow with quantity.

The most important thing to point out is perhaps the fact that utility functions do
not assign a numerical value to our preferences. They simply indicate order and
magnitude of preference, that is, what we like more and by how much.

The marginal rate of substitution (MRS) can be defined as how many units of
good x have to be given up in order to gain an extra unit of good y, while keeping
the same level of utility. Therefore, it involves the trade-offs of goods, in order to
change the allocation of bundles of goods while maintaining the same level of
satisfaction. It can be determined using the following formula:
The MRS is linked with indifference curves, since the slope of this curve is the
MRS. In the adjacent figure you can see three of the most common kinds of
indifference curves.
The first one, which is generally used for defining the utility of consumption for a
given economic agent, has a MRS that changes along the curve, and will tend to
zero when diminishing the quantity of X2 and to infinite when diminishing the
quantity of X1.

In the second graph, both goods are perfect substitutes, since the lines are
parallel and the MRS = 1, that is the slope has an angle of 45º with each axis.
When considering different substitutes goods, the slope will be different and the
MRS can be defined as a fraction, such as 1/2 ,1/3, and so on. For perfect
substitutes, the MRS will remain constant.

Lastly, the third graph represents complementary goods. In this case the horizontal fragment of each
indifference curve has a MRS = 0 and the vertical fractions a MRS = ∞.

Not to be confused with: Marginal rate of technical substitution and Marginal

rate of transformation.

Indifference curves are simply graphical representations of the MRS. They show
how much of something we are willing to sacrifice in order to get more of
something else. Let’s have a quick look at them, they will become important
later on.

Indifference curves are lines in a coordinate system for which each of its points
express a particular combination of a number of goods or bundles of goods that
the consumer is indifferent to consume. This is, the consumer will have no
preference between two bundles located in the same indifference curve, since
they all provide the same degree of utility. The indifference curves, as we move
away from the origin of coordinates, imply higher consumption and, therefore,
increasing levels of utility.

An indifference map is a combination of indifference curves, which allows

understanding how changes in the quantity or the type of goods may change
consumption patterns.
Francis Y. Edgeworth, developed the mathematics concerning the drawing of
indifference curves in his book “Mathematical Psychics: an Essay on the
Application of Mathematics to the Moral Sciences”, 1881, from earlier works by
William Stanley Jevons. However, Vilfredo Pareto was the first economist to draw
indifference maps as we know them nowadays, in his book “Manual of Political
Economy”, published in 1906.
The first example of indifference map showed in the adjacent graph is the most
common representation. It shows four convex indifference curves (red), showing
each curve what amount of a good or bundle of goods x1 the consumer has to
give up in order to be able to consume more goods, or bundles of goods, x2. This
relation gives us the marginal rate of substitution (MRS) between these goods,
which is the slope of the curve in each of its points.

Throughout this whole LP, we keep talking about sacrifice. Sacrifice is probably
the most important concept in Economics, because it’s a quick way to say that,
given we all have limited resources, we can’t ever get everything we want. Our
budget constraint is the resources we allocate to something, which can be a lot,
very little, flexible or fixed. It’s hugely important because, together with utility
functions, it shows what we want and how much we can afford to pay for it: a
maximisation problem.

Consumer behaviour is a maximisation problem. It means making the most of our

limited resources to maximise our utility. As consumers are insatiable, and utility
functions grow with quantity, the only thing that limits our consumption is our
own budget (assuming, of course, we are dealing with normal goods, not negative
or harmful goods which consumption we want to limit).

A budget constraint (green line in the adjacent figure) provides the second half
of the maximisation problem. We need to balance the utility we derive from
consumption with the budget we have.
Supposing we have a choice of two goods, 1 and 2, then our restriction is as

follows:

which simply means that our budget must be at least as much as the price of the
two goods times their respective price.

This simply shows that our consumption is capped and that the more we spend
on one good, the less we can on the other.

Finally, let’s put it all together. We have an idea of what we want from our utility
functions and we know how much we want to spend from our budget constraint.
We therefore have a utility maximisation problem: how to get the most
satisfaction whilst staying within budget. Let’s have a look at it in more detail.
Utility maximisation must be seen as an optimisation problem regarding the
utility function and the budget constraint. These two sides of the problem, define
Marshallian demand curves.

An individual is therefore faced with the following problem: faced with a set of
choices, or baskets of goods, and a fixed budget, how to choose the basket which
maximises their utility?

If we know an individual’s
utility function, and we know their budget, we have the two restrictions necessary
to maximise their utility. This can be done graphically, with the point where
budget and utility function meet defining an optimum, as shown in the adjacent
figure.

It can be also done mathematically, through a Lagrangian, where the first

derivatives determine a system of equations that can be resolved by submitting
our utility function to the restriction presented by the budget:
We have started by learning about the very basics of consumer theory. How
much we like (or need) goods configure utility functions representing our
preferences. This utility functions, when contrasted with our budget constraint,
lead us to resolve our maximisation problem: get the most utility with a given
budget.

However, we could ask ourselves: what if I wanted to get a given utility for the
lowest possible cost? How price changes affect our wellbeing? Is there some
way to actually draw these utility functions?

We will now explain how the consumer reacts to charges in the price of a good,
his money income, tastes and prices of other goods remaining the same. Price
effect shows this reaction of the consumer and measures the full effect of the
change in the price of a good on the quantity purchased since no compensating
variation in income is made in this case.

When, the price of good charges, the consumer would be either better off or
worse off than before, depending upon whether the price falls or rises. In other
words, as a result of change in price of a good, his equilibrium position would lie
at a higher indifference curve in case of the fall in price and at a lower
indifference curve in case of the rise in price.

Price effect is shown in Fig. 8.31. With given prices of goods X and Y, and a given
money income as represented by the budget line PL1, the consumer is in
equilibrium at Q on indifference curve C1. In this equilibrium position at Q, he is
buying OM1 of X and ON1 of Y. Let price of good id X fall, price of Y and his
money income remaining unchanged.
As a result of this price change, budget line shifts to the position PL2. The
consumer is now in equilibrium at R on a higher indifference curve IC2 and is
buying OM2 of X and ON2 of Y. He has thus become better off, that is, his level of
satisfaction has increased as a consequence of the fall in the price of good X.
Suppose that price of X further falls so that PL3 is now the relevant price line.

With budget line PL3 the consumer is in equilibrium at S on indifference curve IC3
where he has OM3 of X and ON3 of Y. If the price of good X falls still further so
that budget line now takes the position of PL4, the consumer now attains
equilibrium at T on indifference curve IC4 and has OM4 of X and ON4 of Y.

When all the equilibrium points such as Q, R, S, and T are joined together, we get
what is called Price Consumption Curve (PCC). Price consumption curve traces
out the price effect. It shows how the changes in price of good X will affect the
consumer’s purchases of X, price of Y, his tastes and money income remaining
unaltered.

In Fig. 8.31 price consumption curve (PCC) is sloping downward. Downward sloping
price consumption curve for good X means that as the price of good X falls, the
consumer purchases a larger quantity of good X and a smaller quantity of good
Y. This is quite evident from Fig. 8.31.

In elasticity of demand, we obtain downward-sloping price consumption curve for

good X when demand for it is elastic (i.e., price elasticity is greater than one). But
downward sloping is one possible shape of price consumption curve. Price
consumption curve can have other shapes also.

In Fig. 8.32 upward-sloping price consumption curve is shown. Upward-sloping

price consumption curve for X means that when the price of good X falls, the
quantity demanded of both goods X and Y rises. We obtain the upward-sloping
price consumption curve for good X when the demand for good is inelastic, (i.e.,
price elasticity is less than one).

Price consumption curve can also have a backward-sloping shape, which is

depicted in Fig. 8.33. Backward-sloping price consumption curve for good X
indicates that when price of X falls, after a point smaller quantity of it is
demanded or purchased. This is true in case of exceptional type of goods called
Giffen Goods.
Price consumption curve for a good can take horizontal shape too. It means that
when the price of the good X declines, its quantity purchased rises
proportionately but quantity purchased of Y remains the same. Horizontal price
consumption curve is shown in Fig. 8.34. We obtain horizontal price consumption
curve of good X when the price elasticity of demand for good X is equal to unity.

But it is rarely found that price consumption curve slopes downward throughout
or slopes upward throughout or slopes backward throughout. More generally,
price consump-tion curve has different slopes at different price ranges. At higher
price levels it generally slopes downward, and it may then have a horizontal
shape for some price ranges but ultimately it will be sloping upward. For some
price ranges it can be backward sloping as in case of Giffen goods. A price
consumption curve which has different shapes or slopes at different price ranges
is drawn in Fig. 8.35.
Income Effect: Income Consumption Curve
(with curve diagram)
With a given money income to spend on goods, given prices of the two goods and
given an indifference map (which portrays given tastes and preferences of the
consumers), the consumer will be in equilibrium at a point in an indifference map.

We are interested in knowing how the consumer will react in regard to his
purchases of the goods when his money income changes, prices of the goods
and his tastes and preferences remaining unchanged.

Income effect shows this reaction of the consumer. Thus, the income effect
means the change in consumer’s purchases of the goods as a result of a change
in his money income. Income effect is illustrated in Fig. 8.28.
With given prices and a given money income as indicated by the budget line P1L1
the consumer is initially in equilibrium at point Q1 on the indifference curve IC1
and is having OM1 of X and ON1 of Y. Now suppose that income of the consumer
increases. With his increased income, he would be able to purchase larger
quantities of both the goods.

As a result, budget line will shift upward and will be parallel to the original budget
line P1L1. Let us assume that the consumer’s money income increases by such an
amount that the new budget line is P2L2(consumer’s income has increased by
L1L2 in terms of X or P1P2 in terms of Y). With budget line P2L2, the consumer is in
equilibrium at point Q2 on indifference curves IC2 and is buying OM2 of X and
ON2 of Y.

Thus as a result of the increase in his income the consumer buys more quantity
of both the goods Since he is on the higher indifference curve IC2 he will be
better off than before i.e., his satisfaction will increase. If his income increases
further so that the budget line shifts to P3L3, the consumer is in equilibrium at
point Q3 on indifference curve IC3 and is having greater quantity of both the
goods than at Q2.
Consequently, his satisfaction further increases. In Fig. 8 28 the consumer’s
equilibrium is shown at a still further higher level of income and it will be seen
that the consumer is in equilibrium at Q4 on indifference curves IC4 when the
budget line shifts to P4L4. As the consumer’s income increases, he switches to
higher indifference curves and as a consequence enjoys higher levels of
satisfaction.

If now various points Q1, Q2, Q3 and Q4 showing consumer’s equilibrium at

various levels of income are joined together, we will get what is called Income
Consumption Curve (ICC). Income consumption curve is thus the locus of
equilibrium points at various levels of consumer’s income. Income consumption
curve traces out the income effect on the quantity consumed of the goods.
Income effect can either be positive or negative.

Income effect for a good is said to be positive when with the increase in income
of the consumer, his consumption of the good also increases. This is the normal
good case. When the income effect of both the goods represented on the two
axes of the figure is positive, the income consumption curve ICQ will slope
upward to the right as in Fig. 8.28. Only the upward- sloping income consumption
curve can show rising consumption of the two goods as income increases.

However, for some goods, income effect is negative. Income effect for a good is
said to be negative when with the increases in his income, the consumer reduces
his consumption of the good. Such goods for which income effect is negative are
called Inferior Goods. This is because the goods whose consumption falls as
income of the consumer rises are considered to be some way ‘inferior’ by the
consumer and therefore he substitutes superior goods for them when his income
rises.

When with the increase in his income, the consumer begins to consume superior
goods, the consumption or quantity purchased by him of the inferior goods falls.
When the people are poor, they cannot afford to buy the superior goods which
are often more expensive. Hence as they become richer and can afford to buy
more expensive goods they switch to the consumption of superior and better
quality goods.
For instance, most of the people in India consider cheaper common food grains
such as maize, jawar, bajra as inferior goods and therefore when their income
rises, they shift to the consumption of superior varieties of foodgrains like wheat
and rice. Similarly, most of the Indian people regard Vanaspati Ghee to be
inferior and therefore as they become richer, they reduce its consumption and
use ‘Desi Ghee instead.

In case of inferior goods, indifference map would be such as to yield income

consumption curve which either slopes backward (i.e., toward the left) as in Fig.
8.29, or downward to the right as in Fig. 8.30. It would be noticed from these two
figures that 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 those of normal goods. In Fig. 8.29 income
consumption curve (ICC) slopes backward i.e., bends toward the Y-axis.

This shows good X to be an inferior good, since beyond point Q2, income effect is
negative for good X and as a result its quantity demanded falls as income
increases. In Fig.8.30 income consumption curve (ICC) slopes downward to the
right beyond point Q2 bends towards the X-axis.
This signifies that good Y is an inferior good because beyond point Q2, income
effect is negative for good Y and as a result its quantity demanded falls as
income increases. It follows from above that the income consumption curve can
have various possible shapes.

But normal goods can be either necessities or luxuries depending upon whether
the quantities purchased of the goods by the consumers increase less than or
more than proportionately to the increases in income. If the quantity purchased
of a commodity rises less than proportionately to the increases in consumer’s
income, the commodity is known as a necessity.

On the other hand, if the quantity purchased of a commodity increases more

than proportionately to the increases in income, it is called a luxury. In Fig. 8.31,
the slope of income consumption curve ICC1 is increasing which implies that the
quantity purchased of the commodity X increases less than proportionately to
the increases in consumer’s income.

Therefore, in this case of ICC1, good X is a necessity and good Vis luxury. On the
other hand, the slope of income consumption curve ICC3is decreasing which
implies that the quantity purchased of good X increases more than
proportionately to increases in income and therefore in this case good X is
luxury and good Vis necessity. It will be seen from Fig. 8.31 that the income
consumption curve ICC2 is a linear curve passing through the origin which
implies that the increases in the quantities purchased of both the goods are
rising in proportion to the increase in income and therefore neither good is a
luxury or a necessity.

If income effect is positive for both the goods X and Y, the income consumption
curve will slope upward to the right as in Fig. 8.28 given earlier. But upward-
sloping income consumption curves to the right for various goods may be of
different slopes as shown in Fig. 8.31 in which income consumption curves, with
varying slopes, are all sloping upward and therefore indicate both goods to be
normal goods having positive income effect.

If income effect for good X is negative, income consumption curve will slope
backward to the left as ICC in fig 8.31. If good Y happens to be an inferior good
and income consumption curve will bend towards X-axis as shown by ICC” in Fig.
8.32. In Figs. 8.31 and 8.32, various possible shapes which income consumption
curve can take are shown bereft of indifference curves and budget lines which
yield them. It may however be pointed out that given an indifference map and a
set of budget lines there will be one income consumption curve.
A noteworthy point is that it is not the indifference curves which explain why a
good happens to be an inferior good. In other words, indifference curves do not
explain why income effect for a good is negative. Indifference curves can only
illustrate the inferior good phenomenon.