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. 

Back to:ECONOMIC ANALYSIS & MONETARY POLICY

Related Topics

• Total utility
• Marginal Utility
• Diminishing Marginal Utility
• Marginal Utility per Dollar
• Rule of Maximizing Utility
• Consumption
• Consumer Goods
• Changes in Income Affect Consumer Choices
• Changes in Price Affect Consumer Choices
• Substitution Effect
• Income Effect
• Budget Constraints Create Demand Curves
• Lifecycle Model of Consumption
• Autonomous Consumption
• Permanent Income Hypothesis
• Lipstick Effect
• Engel's Law
• Consumerism
• Paradox of Thrift
• Ricardo Barro Effect
• Consumer Confidence Index
• The Wealth Effect
• Behavioral Economics