8.7 Engel curves: normal vs. inferior goods

The graph describes the derivation of the Engel curves, i.e. the relationship between income and quantity demanded. In the graph on the left, three budget lines are shown as examples, representing a low, a medium and a high income. The optimal benefit indifference curves are shown for each of these (cf. chapter Consumer Decision). The point of contact of the indifference curve with the respective budget line represents the optimal point of consumption. In the graph on the right, we deduce the optimum amount of demand for each income level. The current income level can be adjusted using the slider. The red dot in the left graph shows the respective optimum consumption point. In the right graph, the corresponding point is presented in the income-quantity-diagram. For a low income almost all goods are normal goods, i.e. with increasing income the quantity demanded also increases. Intuitively, this can be explained as follows: The higher income allows to spend additional money (at least partially) on the good and thereby increase benefit. Above a certain level of income, however, the good is increasingly replaced by a higher-value one. Then, the demand decreases with increasing income: the good is inferior. A typical example of the change from a normal good to an inferior good is simple rye bread. Above a certain income, this staple is more and more replaced by alternatives such as bread rolls or baguettes.