Changes in Income and Consumer Choice
How do changes in income affect Consumer Choices?
Written by Jason Gordon
Updated at March 15th, 2023
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How do Changes in Income Affect Consumer Choices?
How does a rise in income affect a consumer’s utility-maximizing choice?
When deciding the combination of two (or more) goods to purchase, the utility maximizing choice will be the point at which the marginal utility received from the purchase of the next unit of each good is equal.
Generally, if a person makes more income that will purchase more of each good. If they make less income, they will purchase less of each good. Still the same rules of utility maximization are true. You should purchase the combination of goods where the marginal utility received from the purchase of the next good is equal between the options.
This point will change with an increase or decrease in available budget for purchase. For example, the lower income may result in a budget constraint that requires a shift in the utility received from each item. For another example, sometimes the need or want for a good declines as income increases and increases as income declines. These are known as inferior goods.