Income-Consumption Curve
The income-consumption curve illustrates how a consumer’s choices shift as their income changes. The optimal choice is found where the consumer’s indifference curve (showing their preferences) meets their budget constraint (reflecting their spending limits). When income varies, the budget line shifts: it moves outward if income increases and inward if it decreases. The budget line’s slope, however, stays constant as it’s defined by -p1/p2.
By linking the points of optimal choice, we trace the income-consumption curve, which reveals how consumption choices evolve at different income levels. For instance, in the diagram above, the significance of good X1 in the consumer's basket diminishes as income rises from R1 to R3. The curve’s slope changes depending on the nature of the goods. In the previous example, both goods are normal goods, meaning demand for each increases with income. However, if one of the goods were inferior, the income-consumption curve would look like this:
As shown, when income rises from R1 to R3, the quantity demanded for good X1 in the consumer’s basket decreases, while demand for good X2 rises. This signals that good X1 is an inferior good (e.g., potatoes). With higher income, the consumer has already covered basic needs (like hunger and security) and can now afford more expensive, higher-quality substitutes (such as meat), moving toward fulfilling higher-order needs in line with Maslow’s hierarchy. Meanwhile, good X2 remains a normal good, as its demand continues to grow with income.
To represent the income-consumption curve for an inferior good, the other good should ideally be normal, or at the very least, not inferior as well. If both goods were inferior, demand for each would decrease as income rose. According to standard consumer preference principles, an increase in income should lead to greater demand for at least one of the goods. To focus on the demand for a single good as income varies—without considering other items in the consumer's basket—the Engel curve is often more suitable.
