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.