Editing Income–consumption curve (section)

===Inferior goods===

[[File:Income consumption curve graph - downward sloping (inferior goods).svg|thumb|300px|Figure 3: with an increase of income, demand for normal good X<sup>2</sup> rises while, demand for inferior good X<sup>1</sup> falls.]]

The figure on the right (figure 3), 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, where B1 and B2 are the budget lines and I<sup>1</sup> and I<sup>2</sup> are the indifference curves. Figure 3 clearly shows that, with a rise in the income of the consumer, the initial budget line B1 moves outward parallel to itself to B2 and the consumer now chooses X<sup>'</sup> bundle to the initial bundle X<sup>*</sup>. The figure shows that, the demand for X<sup>2</sup> has risen from X<sup>2</sup><sub>1</sub> to X<sup>2</sup><sub>2</sub> with an outward shift of the budget line from B1 to B2 (caused due to rise in the income of the consumer). This essentially means that, good X<sup>2</sup> is a normal good as the demand for X<sup>2</sup> rose with an increase in the income of the consumer.

In contrast, it is to be noted from the figure, that the demand for X<sup>1</sup> has fallen from X<sup>1</sup><sub>1</sub> to X<sup>1</sup><sub>2</sub> with an outward shift of the budget line from B1 to B2 (caused due to rise in the income of the consumer). This implies that, good X<sup>1</sup> is an inferior good as the demand for X<sup>1</sup> fell with an increase in the income of the consumer.

The consumer maximizes his utility at points X<sup>*</sup> and X<sup>'</sup> and by joining these points, the income–consumption curve can be obtained.<ref name="oup.com">{{cite book|url=http://www.oup.com/us/pdf/microecon/ch04ppt.pdf|title=Microeconomics|last=Salvatore|first=Dominick|archiveurl=https://web.archive.org/web/20121020053829/http://www.oup.com/us/pdf/microecon/ch04ppt.pdf|archivedate=October 20, 2012|url-status=dead}}</ref> In figure 3, the income–consumption curve bends back on itself as with an increase income, the consumer demands more of X<sup>2</sup> and less of X<sup>1</sup>.<ref name=econconcepts>[http://economicsconcepts.com/application_of_indifference_curves.htm Application of Indifference Curve Analysis] {{Webarchive|url=https://web.archive.org/web/20191227215022/http://economicsconcepts.com/application_of_indifference_curves.htm |date=December 27, 2019 }}, EconomicsConcepts.com, retrieved April 25, 2017.</ref> The income–consumption curve in this case is negatively sloped and the income elasticity of demand will be negative.<ref name="P&R">{{cite book|last=Rubinfeld|first=Daniel|url=https://archive.org/details/microeconomics0000pind_v8k1/page/98/mode/2up?q=%22income+elasticity+of+demand%22|title=Microeconomics|last2=Pindyck|first2=Robert|publisher=Tsinghua University Press/Prentice-Hall|year=1995|isbn=7-302-02494-4|location=Mainland China|pages=98}}</ref> Also the price effect for X<sup>2</sup> is positive, while it is negative for X<sup>1</sup>.<ref name="econconcepts"/>

<math>\Delta X_n^1</math> is the change in the demand for good 1 when we change income from <math>m'</math> to <math>m</math>, holding the price of good 1 fixed at <math> p_1</math>:

<math>\Delta X_n^1 = X^1(p_1, m) - X^1(p_1,m').</math>
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