notes on ICC & PCC in economics
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With a given money income to spend on goods, given prices of the two goods and given an indifference map (which portrays given tastes and preferences of the consumers), the consumer will be in equilibrium at a point in an indifference map.
We are interested in knowing how the consumer will react in regard to his purchases of the goods when his money income changes, prices of the goods and his tastes and preferences remaining unchanged.
Income effect shows this reaction of the consumer. Thus, the income effect means the change in consumer’s purchases of the goods as a result of a change in his money income. Income effect is illustrated in Fig. 8.28.
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With given prices and a given money income as indicated by the budget line P1L1 the consumer is initially in equilibrium at point Q1 on the indifference curve IC1 and is having OM1 of X and ON1 of Y. Now suppose that income of the consumer increases. With his increased income, he would be able to purchase larger quantities of both the goods.
As a result, budget line will shift upward and will be parallel to the original budget line P1L1. Let us assume that the consumer’s money income increases by such an amount that the new budget line is P2L2(consumer’s income has increased by L1L2 in terms of X or P1P2 in terms of Y). With budget line P2L2, the consumer is in equilibrium at point Q2 on indifference curves IC2 and is buying OM2 of X and ON2 of Y.
Thus as a result of the increase in his income the consumer buys more quantity of both the goods Since he is on the higher indifference curve IC2he will be better off than before i.e., his satisfaction will increase. If his income increases further so that the budget line shifts to P3L3, the consumer is in equilibrium at point Q3 on indifference curve IC3 and is having greater quantity of both the goods than at Q2.
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Consequently, his satisfaction further increases. In Fig. 8 28 the consumer’s equilibrium is shown at a still further higher level of income and it will be seen that the consumer is in equilibrium at Q4 on indifference curves IC4 when the budget line shifts to P4L4. As the consumer’s income increases, he switches to higher indifference curves and as a consequence enjoys higher levels of satisfaction.
If now various points Q1, Q2, Q3 and Q4 showing consumer’s equilibrium at various levels of income are joined together, we will get what is called Income Consumption Curve (ICC). Income consumption curve is thus the locus of equilibrium points at various levels of consumer’s income. Income consumption curve traces out the income effect on the quantity consumed of the goods. Income effect can either be positive or negative.
Income effect for a good is said to be positive when with the increase in income of the consumer, his consumption of the good also increases. This is the normal good case. When the income effect of both the goods represented on the two axes of the figure is positive, the income consumption curve ICQ will slope upward to the right as in Fig. 8.28. Only the upward- sloping income consumption curve can show rising consumption of the two goods as income increases.
However, for some goods, income effect is negative. Income effect for a good is said to be negative when with the increases in his income, the consumer reduces his consumption of the good. Such goods for which income effect is negative are called Inferior Goods. This is because the goods whose consumption falls as income of the consumer rises are considered to be some way ‘inferior’ by the consumer and therefore he substitutes superior goods for them when his income rises.
We are interested in knowing how the consumer will react in regard to his purchases of the goods when his money income changes, prices of the goods and his tastes and preferences remaining unchanged.
Income effect shows this reaction of the consumer. Thus, the income effect means the change in consumer’s purchases of the goods as a result of a change in his money income. Income effect is illustrated in Fig. 8.28.
ADVERTISEMENTS:

With given prices and a given money income as indicated by the budget line P1L1 the consumer is initially in equilibrium at point Q1 on the indifference curve IC1 and is having OM1 of X and ON1 of Y. Now suppose that income of the consumer increases. With his increased income, he would be able to purchase larger quantities of both the goods.
As a result, budget line will shift upward and will be parallel to the original budget line P1L1. Let us assume that the consumer’s money income increases by such an amount that the new budget line is P2L2(consumer’s income has increased by L1L2 in terms of X or P1P2 in terms of Y). With budget line P2L2, the consumer is in equilibrium at point Q2 on indifference curves IC2 and is buying OM2 of X and ON2 of Y.
Thus as a result of the increase in his income the consumer buys more quantity of both the goods Since he is on the higher indifference curve IC2he will be better off than before i.e., his satisfaction will increase. If his income increases further so that the budget line shifts to P3L3, the consumer is in equilibrium at point Q3 on indifference curve IC3 and is having greater quantity of both the goods than at Q2.
ADVERTISEMENTS:
Consequently, his satisfaction further increases. In Fig. 8 28 the consumer’s equilibrium is shown at a still further higher level of income and it will be seen that the consumer is in equilibrium at Q4 on indifference curves IC4 when the budget line shifts to P4L4. As the consumer’s income increases, he switches to higher indifference curves and as a consequence enjoys higher levels of satisfaction.
If now various points Q1, Q2, Q3 and Q4 showing consumer’s equilibrium at various levels of income are joined together, we will get what is called Income Consumption Curve (ICC). Income consumption curve is thus the locus of equilibrium points at various levels of consumer’s income. Income consumption curve traces out the income effect on the quantity consumed of the goods. Income effect can either be positive or negative.
Income effect for a good is said to be positive when with the increase in income of the consumer, his consumption of the good also increases. This is the normal good case. When the income effect of both the goods represented on the two axes of the figure is positive, the income consumption curve ICQ will slope upward to the right as in Fig. 8.28. Only the upward- sloping income consumption curve can show rising consumption of the two goods as income increases.
However, for some goods, income effect is negative. Income effect for a good is said to be negative when with the increases in his income, the consumer reduces his consumption of the good. Such goods for which income effect is negative are called Inferior Goods. This is because the goods whose consumption falls as income of the consumer rises are considered to be some way ‘inferior’ by the consumer and therefore he substitutes superior goods for them when his income rises.
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Explanation:
income consumption curve price consumption curve
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