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Income Consumption Curve and Engel curve Part 3 [Inferior Good & Neutral Good] - YouTube
Channel: Vellaichamy Nallasivam
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Income Consumption Curve and Engel curve Part 3
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In part 1 and 2, we learned the technique of deriving
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Engel curve from ICC for necessary and luxury goods.
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Please view those two videos.
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The links are given in the description.
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To get regular updates, please subscribe.
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Feel free to give your comment.
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In this lesson, we shall try to obtain the Engel curve for inferior good and neutral good.
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Look at figure 1. Good-x along the x-axis is an inferior good.
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Given the prices of two goods and income, the consumer is in equilibrium at E1.
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The consumers income is Rs.100.
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40 units of good – x is purchased.
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Price remaining the same when the income increases to Rs.200, 300 and 400,
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the consumer is in equilibrium at E2, E3, and E4.
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The curve joining these points is ICC.
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At each equilibrium point E2, E3, and E4
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we can find the quantity by moving down to the x-axis.
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They are 35, 30, 20 units.
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We have income and quantity pairs of data.
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Now we shall represent these pairs of data in figure 2.
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Income is measured along the Y-axis
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and quantity of good-X is measured along the X- axis.
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At E1, the income is Rs.100 and quantity purchased is 40 units.
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We shall plot this point in figure -2 as A.
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Corresponding to E2, let us fix the point B,
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to represent Rs.200 income and 35 units of Good-X.
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Similarly point C, represents Rs.300 income and 30 units of good-x and D depicts Rs.400 income and 20 units of good-X.
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Join points A, B, C and D with the help of a smooth curve.
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The resultant curve is called Engel curve.
The curve slopes upward from right to left.
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As the income increases, the quantity purchased falls. According to Engel’s Law good-x is an inferior good.
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There is an extreme case of Engel curve.
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Look at these graphs. You shall find the Engle curve in figure 2.
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It is vertical and parallel to Y-axis.
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It represents neutral good. Though the income increases from Rs.100 to Rs.400,
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the same quantity, 20 units is purchased.
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This Engel curve is derived from the ICC shown in figure 1
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which is also vertical and parallel to Y axis.
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Since the same quantity is purchased irrespective of income, good-x is neutral.
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Our discussion on Engel curve ends with this lesson. But we shall meet shortly.
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