What is the Income Effect?
- As a consumer’s income rises or declines their demand for goods also fluctuates
- An increase in income = An increase in demand for goods
- A decrease in income = A decrease in demand for goods
Life Application/Analogy
Say you usually make $18/hr. If you earn a raise to $22/hr you will then have an excess amount of money you usually do not have, which will likely prompt you to buy more goods. If you then move onto another job that pays you $17/hr this will lower your buying power, and simultaneously your demand for goods.
How do I remember it?
When I make more money one month I have a greater inclination to spend, but when I make less money I don’t want to spend. My demand therefore increases in correlation with my income.
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