Economics, 3rd Edition

The Income Expansion Path

As income increases, shown by the shifts in the budget constraint from 

BC

1

 to BC

3 

, the consumer optimum changes as shown by the income 

expansion path. In this example, both cola and pizza are normal  

goods – as income rises the demand for cola and pizza rises.

Th I

E

i

FIGURE 5.18

Quantity

of cola

Quantity

of pizza

Income expansion path

A

B

C

I

1

I

2

I

3

BC

3

BC

2

BC

1

If we connect these points we get the income expansion path which reflects the response of a rational 

consumer to a change in income. In this example, the increase in income has led to an increase in the 

consumption of both pizza and cola, and as a result we can conclude that both goods are normal goods. In 

both goods the income effect outweighs the substitution effect.