Question

What is the income effect?? Economics

Answer 1

The income effect is a term used in economics to describe how consumer spending changes, typically based on price of consumer goods. Given the same income, consumer habits and quantity of items desired tends to be affected by price of those items.

Answer 2

Income effect is a striking effect seen on consumption of goods resulting from consequence of changes in real income of individual.

Explanation:

Income effect can be positive when the real income of individual increases i.e, consumers increase their consumption when the income increases. Income effect is negative when there is a decrease in real income of individuals. Income effect can be direct and indirect.

A direct income effect occurs when a consumer decides to reduce his consumption depending on his decrease in income. Income effect is indirect when a consumer decides to reduce consumption depending on others factors and not income. For example, food prices in restaurants may go up which leaves consumers to spend less income on other products, hence the consumer will decide not to dine out.