An indifference curve illustrates a consumer's relative preference for two goods at given levels of income. The income consumption curve connects the points at which indifference curves touch the consumer's budget line. As a consumer's income increases, the demand for a normal good increases, while demand decreases as income decreases.
- Create a graph with two axes and at least two budget lines
Select a point of origin, and draw two lines from the origin: one vertical up from the origin and one horizontal to the right of the origin. Each line represents the quantity of a given good. Draw at least two downward sloping budget lines. The budget lines begin on the vertical axis and end on the horizontal axis, and each represents a different level of income.
- Derive and draw indifference curves.
Analyze your data to determine which combinations of goods yield the same satisfaction to the consumer. This is done by determining how much of one good the consumer is willing to give up to obtain another unit of the second good and marking each combination on the graph. Connect the points to form a U-shaped indifference curve. Repeat on each additional budget line.
- Draw the income consumption curve
Starting at the point where the first indifference curve touches the first budget line, draw a curved line that connects the points at which each indifference curve touches its budget line. This completes the income consumption curve.