Explain the income effect for inferior and normal goods.

The income effect is the change in the consumer's equilibrium (and hence in the quantity demanded) caused by a change in money income, with the prices of both goods held constant; joining the successive equilibrium points traces the Income Consumption Curve (ICC), from which Ernst Engel derived the Engel curve.

1. Meaning of the income effect: it isolates how consumption changes when only income changes, prices remaining the same.
2. How it operates: a rise in income shifts the budget line outward parallel to itself (a fall shifts it inward parallel), because relative prices are unchanged.
3. New equilibria: at each new budget line the consumer reaches a fresh tangency point on a higher (or lower) indifference curve.
4. Income Consumption Curve (ICC): joining these successive equilibrium points gives the ICC, which shows how consumption responds to income.
5. Engel curve: re-plotting the income–quantity relationship gives the Engel curve, useful for studying household spending patterns.

The income effect for normal goods:

6. Positive income effect: for a normal good, a rise in income raises the quantity demanded, so income and demand move in the same direction.
7. Shape of the ICC: the ICC slopes upward to the right, since more of the good is bought as income rises.
8. Engel curve: the Engel curve for a normal good slopes upward, showing a positive income elasticity of demand.
9. Example: as a family's income grows, it buys more ghee and better clothes.

The income effect for inferior goods:

10. Negative income effect: for an inferior good, a rise in income lowers the quantity demanded, so income and demand move in opposite directions.
11. Reason: as the consumer grows richer, they switch away from the cheaper, lower-quality good toward superior substitutes.
12. Shape of the ICC: the ICC bends backward (toward the axis of the other good) once the good becomes inferior, rather than sloping steadily upward.
13. Engel curve: the Engel curve for an inferior good slopes downward, showing a negative income elasticity of demand.
14. Example: as income rises, a household buys less of the cheapest coarse rice.
15. Zero case for contrast: for a neutral good, income changes leave demand unchanged, so the ICC is a straight line parallel to the good's axis and the Engel curve is vertical.

Thus, the income effect is positive for normal goods (upward ICC and Engel curve) and negative for inferior goods (backward-bending ICC and downward Engel curve), which is exactly how the two types of goods are distinguished.