ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The income effect is a change in the demand for a good or service due to a change in a consumer’s purchasing power, which is, in turn, due to a change in their real income. It’s part of consumer choice economic theory that relates to how wealthy consumers feel.

Detailed explanation-2: -The income effect is the change in the consumption of goods by consumers based on their income (purchasing power). The substitution effect happens when consumers replace cheaper items with more expensive ones due to price changes or when their financial conditions improve, and vice-versa.

Detailed explanation-3: -The income effect describes how a change in a consumer’s purchasing power changes their demand for products. Generally, higher levels of purchasing power lead to higher demand and more demand for high-quality goods. Increases in purchasing power can come from increased income or from decreased prices for goods.

Detailed explanation-4: -Consumption increases as current income increases, and the larger the marginal propensity to consume, the more sensitive current spending is to current disposable income. The smaller the marginal propensity to consume, the stronger is the consumption-smoothing effect.

Detailed explanation-5: -The income effect is the change or shift in the level of consumption of goods and services when the purchasing power of consumers changes. This can be due to the fluctuations in the consumer’s income, which changes their consumption patterns which in turn changes the prices of goods.