Wize University Microeconomics Textbook > Theory of Consumer Choice
Changes in Income
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Changes in Income
Changes in income shifts the budget constraint and tells us whether a product is normal or inferior.
- Normal Goods - when your income rises you buy more of these products
- Inferior Goods - when your income rises you buy less of these products
- In the diagram above, when the income increases, the optimal bundle (utility maximization) changes from point A to point B.
- This means we are buyingmoreunits of good X andmoreunits of good Y which means they are bothnormalgoods.
- In the diagram above, as the budget increases, we buymoreunits of X which means X is anormalgood.
- As the budget increases, we buylessunits of of Y which means Y is aninferiorgood.
- In the diagram above, as the budget increases, we buylessunits of X which means X is aninferiorgood.
- In the diagram above, as the budget increases, we buymoreunits of Y which means Y is anormalgood..
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Example: Changes in Income
In the diagram above,
A) Books are inferior and milkshakes are normal
B) Books and milkshakes are normal
C) Books and milkshakes are inferior
D) Books are normal and milkshakes are inferior
D
As the budget shifts right we are buying more books so books are normal, but we are buying less milkshakes so milkshakes are inferior.