ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -An increase in income results in an increase in the demand for goods and services while a decrease in income results in a decrease in demand; though not always. The marginal propensity to spend and the marginal propensity to save are looked at when determining the influences of the income effect.

Detailed explanation-2: -Solution. At a lower level of income, a consumer spends a larger proportion of his/her income on consumption expenditure (basic survival requirements). As the income increases, owing to the psychological behavior of a consumer (rational), people tend to consume less and save more for future uncertainty.

Detailed explanation-3: -The income effect identifies the change in consumers’ demand for goods and services based on their incomes. In general, as one’s income rises, they will begin to demand more goods. Similarly, A decrease in income results in lower demand.

Detailed explanation-4: -When Income increases, consumption expenditure also increases but by a smaller amount. Thus, it increases less than proportionately. 4. The increased income will be divided in some proportion between consumption expenditure and saving.