How will you explain the law of demand with the help of income effect?
Answers
The income effect can be practically reflected by the law of demand which is related to the change in consumer behavior or quantity demanded of any good or service when the price of that good or service changes.
Explanation:
In Microeconomics,law of demand basically holds the inverse relationship between price of any product or service and its quantity demanded by the rational consumers or buyers,implying that as price of any normal good or service goes up,its quantity demanded among consumers or buyers decreases and vise versa.Now,income effect basically shows the change in the real income of consumers or buyers when the price of any good or service changes.Hence,when the price of any good or service decreases,the real purchasing power of the consumer or buyer increases or in other words,due to higher income level the price of any particular good or service would be relative cheaper to the consumer or buyer compared to before or prior to increase in the income.He or she would be able to buy more of that particular good or service,considering the price of the good or service has remained constant or fixed.Therefore,as the income level of the consumers or buyers goes up,everything else held constant,the quantity demanded of any normal good or service increase,assuming no change in the price of that good or service.Note that this phenomenon ideally reinforces law of demand through income effect.Now,it must be remembered that in the case of inferior goods,income effect does not hold so we are only considering normal goods and services in this particular instance.