Editing Income–consumption curve (section)

==Consumer theory==
[[File:Income consumption curve graph.svg|thumb|300px|left|Figure 1: An increase in the income, with the prices of all goods fixed, causes consumers to alter their choice of market basket. The extreme left and right indifference curves belong to different individuals with different preferences, while the three central indifference curves belong to one individual for whom the income-consumption curve is shown. Each blue line represents one level of total consumption expenditure common to all its points; its slope depends on the two goods' relative prices.]]

The income effect is a phenomenon observed through changes in purchasing power. It reveals the change in quantity demanded brought by a change in real income. The figure 1 on the left shows the consumption patterns of the consumer of two goods X<sup>1</sup> and X<sup>2</sup>, the prices of which are ''p''<sub>1</sub> and ''p''<sub>2</sub> respectively. The initial bundle X<sup>*</sup>, is the bundle which is chosen by the consumer on the budget line B<sub>1</sub>. An increase in the money income of the consumer, with ''p''<sub>1</sub> and ''p''<sub>2</sub> constant, will shift the budget line outward parallel to itself.

In the figure, this means that the change in the money income of the consumer will shift the budget line B1 outward parallel to itself to B2 where the bundle X<sup>'</sup> bundle will be chosen. Again, an increase in the money income of the consumer will push the budget line B2 outward parallel to itself to B3 where the bundle X<sup>"</sup> will be the bundle which will be chosen. Thus, it can be said that,  with variations in income of the consumers and with the prices held constant the '''income–consumption curve''' can be  traced out as the set of optimal points.
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