... goods, with luxury goods having higher income elasticity than necessities. For any inferior good, income elasticity is negative. (ii) There are axioms and 'sensible rules' in relation to consumer preferences. The sensible rule of monotonicity follows that 'more is better, less is worse' - it assumes that people are greedy and always want more. The sensible rule of diminishing marginal rate of substitution follows that the rate at which the individual is willing to exchange will fall, and this is what gives the negative slope of indifference curves. The axiom of transivity means that indifference curves can never cross. According to this axiom preferences are such that if bundle X is preferred to bundle Y, and bundle Y is preferred to bundle Z then X is preferred to Z4. Let us look at a specific example which follows these axioms and rules and shows the different effects on consumption of normal ...

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