(Appendix) An income compensated demand curve

Question

Quizplus · Accepted Answer

The income compensated demand curve accounts for changes in consumption as prices change, holding utility constant by adjusting income. For a normal good, it's steeper because it removes the income effect, making it purely about the substitution effect. For an inferior good, it's flatter because the income effect, which normally works against the substitution effect, is removed, emphasizing the substitution effect. A Giffin good, which is a type of inferior good, has a negatively sloped demand curve because as its price increases, people consume more of it due to the income effect overpowering the substitution effect; removing the income effect with compensation highlights this unique behavior.

(Appendix) an Income Compensated Demand Curve