ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -The income effect describes how an increase in income can change the quantity of goods that consumers will demand. For so-called normal goods, as income rises so does the demand for them (and vice-versa). This is reflected in microeconomics via an upward shift in the downward-sloping demand curve.

Detailed explanation-2: -There is a positive (direct) relationship between income of the consumer and the demand of normal good. With the increase in income of the consumer, consumer starts demanding more of normal good. For example with the increase in income, consumer demands for normal good (Colour TV).

Detailed explanation-3: -For most goods, called normal goods, if consumer incomes increase, demand will increase and vice versa. So if incomes increase, the demand curve for restaurant meals, and cars, and boats, will shift to the right. At the same prices people will buy more.

Detailed explanation-4: -The income effect is the resulting change in demand for a good or service caused by an increase or decrease in a consumer’s income or purchasing power. As income rises, the income effect assumes that people will begin to demand more goods, such as normal goods.

Detailed explanation-5: -As we learned previously, inferior goods have an inverse relationship between income and demand, which results in a negative income elasticity of demand. On the other hand, normal goods have a positive relationship between income and demand which is reflected in a positive income elasticity of demand.