Individual demand ■ ncome Changes o Using the figures developed in the previous chapter, the impact of a change in the income can be illustrated using indifference curves Chapter 4 Slide 11
Chapter 4 Slide 11 Individual Demand ◼ Income Changes ⚫ Using the figures developed in the previous chapter, the impact of a change in the income can be illustrated using indifference curves
Effects of Income Changes Clothing (units per Assume: P=$1 month) Pe=$2 /=$10,$20,$30 Income-Consumption D An increase in income with the prices fixed, causes consumers to alter B their choice of market basket U Food(units per month) Chapter 4 Slide 12
Chapter 4 Slide 12 Effects of Income Changes Food (units per month) Clothing (units per month) An increase in income, with the prices fixed, causes consumers to alter their choice of market basket. Income-Consumption Curve 3 4 A U1 5 10 B U2 7 D 16 U3 Assume: Pf = $1 Pc = $2 I = $10, $20, $30
Effects of Income Changes Price An increase in income from $10 to $20 to $30 food with the prices fixed shifts the consumer's demand curve to the right E G H $100 D D2 Food(units per month) Chapter 4 Slide 13
Chapter 4 Slide 13 Effects of Income Changes Food (units per month) Price of food An increase in income, from $10 to $20 to $30, with the prices fixed, shifts the consumer’s demand curve to the right. $1.00 4 D1 E 10 D2 G 16 D3 H
Individual demand ■ ncome Changes o The income-consumption curve traces out the utility-maximizing combinations of food and clothing associated with every income level Chapter 4 Slide 14
Chapter 4 Slide 14 Individual Demand ◼ Income Changes ⚫ The income-consumption curve traces out the utility-maximizing combinations of food and clothing associated with every income level
Individual demand ■ ncome Changes o An increase in income shifts the budget line to the right, increasing consumption along the income-consumption curve o Simultaneously, the increase in income shifts the demand curve to the right Chapter 4 Slide 15
Chapter 4 Slide 15 Individual Demand ◼ Income Changes ⚫ An increase in income shifts the budget line to the right, increasing consumption along the income-consumption curve. ⚫ Simultaneously, the increase in income shifts the demand curve to the right