This lesson explains how a change in income can shift a consumer’s budget constraint and alter the utility-maximizing combination of goods. It also introduces normal and inferior goods.
A budget constraint represents the combinations of goods a consumer can afford given income and prices. When income rises while prices remain unchanged, the consumer can afford more of both goods. The budget constraint shifts outward, parallel to the original constraint. When income falls, it shifts inward.
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What is a budget constraint?
It shows the combinations of goods a consumer can afford given available income and the prices of those goods.
How does higher income affect the budget constraint if prices stay the same?
It shifts the constraint outward, making more combinations affordable. It does not, by itself, specify the consumer’s preferred combination.
What is a normal good?
A good for which quantity demanded increases when income increases and decreases when income decreases, with other factors held constant.
What is an inferior good?
A good for which quantity demanded decreases when income rises, other things equal. Consumers may switch toward alternatives they prefer as they become more able to afford them.
Does “inferior good” mean a good is low quality?
No. The term describes how demand responds to income, not the good’s quality. A good may be inferior for one consumer but not for another.
Quiz questions
A consumer chooses between bats on the horizontal axis and cameras on the vertical axis. If the price of bats rises while income and the camera price stay fixed, how does the budget constraint change?Answer: It pivots inward around the vertical-axis intercept.
What does the substitution effect describe when the price of a good changes?Answer: The consumption change caused by a change in relative prices.
When a price increase reduces a consumer’s purchasing power, what does the income effect refer to?Answer: The resulting consumption change due to altered real purchasing power.
A consumer buys more of a good when income rises, with other factors held constant. How is the good classified for that consumer?Answer: As a normal good.
How does the budget-choice framework generate points on a demand curve?Answer: For each price, record the quantity in the utility-maximizing bundle, holding other relevant influences constant.
Based on Principles of Economics 3e by Steven A. Greenlaw, David Shapiro, Daniel MacDonald (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.