Economics, 3rd Edition

The Income Expansion Path

Having looked at conclusions that can be drawn from assuming a change in price (holding all other things 

constant) we now turn our attention to what happens if we change income (ceteris paribus).

How does the rational consumer respond to a change in income? In Chapter 3 we noted that, for a 

normal good, a rise in income is associated with a rise in demand but, for an inferior good, a rise in income 

means a fall in demand. We now have the analytical tools to understand why this is the case.

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CHAPTER 5  BACKGROUND TO DEMAND: THE THEORY OF CONSUMER CHOICE  123

Normal Goods 

Figure 5.18 shows a series of increases in income represented by three budget con-

straints BC

1

, BC

2

 and BC

3

 for cola and pizza. The consumer optimums in each case are indicated by points 

A, B and C.