Question

Define and give an example of the income effect?

Answer 1

The change in consumption resulting froma change in real income. For ex. when an individuals income increases, other things remaining the same, that person will demand more goods and services; thus increasing their consumption.

A change in the demand of a good or service, induced by a change in the consumers' discretionary income. Any increase or decrease in price correspondingly decreases or increases consumers' discretionary income which, in turn, causes a lower or higher demand for the same or some other good or service.