ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -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-2: -The income effect is the change in the consumption of goods based on income. This means consumers will generally spend more if they experience an increase in income. They may spend less if their income drops.

Detailed explanation-3: -The income effect states that when the price of a good decreases, it is as if the buyer of the good’s income went up. The substitution effect states that when the price of a good decreases, consumers will substitute away from goods that are relatively more expensive to the cheaper good.

Detailed explanation-4: -Positive Income Effect This means that as the price of a product decreases, demand will increase as the product becomes more affordable, and consumers’ spending power for that product increases.

Detailed explanation-5: -Normal goods and services will generally have a positive income effect. As income increases, demand also increases; and as income falls, demand falls. When demand falls in response to an increase in income, the good or service is likely an inferior good, and it is said to have a negative income effect.