Econ 11Hoi Ling Chin/

7a: Income Expansion Path

The income expansion path (also called income consumption curve, IEP) is a graph that shows how different income affects consumption of two different products. To find the income expansion path, you find the consumer's optimum of each budget constraint and draw a curve to connect the consumer's optimums together. Figure 7.a.1 shows an example of an income expansion path.

The budget constraint is a graph shows how income is divided between two products. Any point below that line is within a person's budget and therefore is affordable. Any point above the line is not affordable since it exceeds a persons income.

The consumer's optimum is the point when the slope of the budget constraint is equal to the slope of the indifference curve.


Figure 7.a.1 shows that when the income is $50, the person can afford 50 units of Y and 25 units of X. Therefore the budget constraint intercepts Y at 50 and X at 25. Similarly for an income of $100 where the person can afford 100 units of Y and 50 units of X, and for an income of $200 where the person can afford 200 units of Y and 100 units of X. At each income, there is a unique consumer's optimum, draw a line through the consumer's optimum and that line is called the income expansion path.

The shape of the income expansion path shows whether a product is a normal good or an inferior good. When the income expansion path curves downwards towards the X-axis then Y is an inferior good and X would be a normal good. Since as income increases the consumption of X increase and the consumption of Y decreases. Similarly when the income expansion path curves upwards towards the Y-axis then X is the inferior good and Y is the normal good instead. Figure 7.a.2 shows the IEP of Y being an inferior good and figure 7.a.3 shows the IEP of X being an inferior good.



Study Questions:

  1. If a person's income decrease then the income expansion path would:

a. curve downwardsc. curve upwards

b. have a negative sloped. upward sloping

  1. What does a downward curving towards X-axis income expansion path represent? Why?
  2. If either budget constraints or consumer's optimum is not given, is it possible to draw an income expansion path? Explain why.
  3. What does an income expansion path show?
  4. If only one consumer's optimum is given, is it possible to find an income expansion path? Explain why.
  5. How is the relationship between X and Y being represented by the income expansion path?

Answers:

  1. d
  2. A downward curving income expansion path means that product Y is an inferior good because as income increases the consumption of Y decreases.
  3. It is not possible. If a budget constraint is not given then the consumer's optimum cannot be found and without a consumer's optimum the income expansion path cannot be found.
  4. The income expansion path shows the consumer's spending tread between 2 goods at different income level.
  5. It is not possible. The income expansion path shows the spending habit at different income levels.
  6. The income expansion path shows how a person divides their income between X and Y.