The income effect in economics can be defined as the change in consumption resulting from a change in real income. It is a phenomenon observed through changes in purchasing power, revealing the change in quantity demanded brought by a change in real income. When a consumers purchasing power increases due to a rise in income, they may demand a greater quantity of goods for purchase, especially for normal goods. Conversely, a decrease in purchasing power may lead to a decrease in demand for goods. The income effect is a part of consumer choice theory, expressing how changes in relative market prices and incomes impact consumption patterns for consumer goods and services. It is important to note that the income effect is distinct from the substitution effect, which measures how consumption is affected by a relative change in price and the availability of substitutable products.
In summary, the income effect is a crucial concept in microeconomics, illustrating the impact of changes in real income on consumer demand for goods and services.
