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, in microeconomics, is the resultant change in demand for a good or service caused by an increase or decrease in a consumer’s purchasing power or real income. As one’s income grows, the income effect predicts that people will begin to demand more (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: -When the price of a good changes, the price of that good relative to the price of other goods also changes. Relative price changes cause consumers to substitute from one good to another-this is known as the substitution effect.

Detailed explanation-5: -The income effect refers to a change in the quantity demanded of a good because of a change in the buyer’s real income. This is because the income effect is as a result of a change in the purchasing power for consumers. A change in the consumers’ purchasing power is usually caused by a change in the real income.