What is the income effect?

The change that the quantity consumed of a good experiences due to its price change is called the total effect. Within the total effect we find two types of effects. He substitution effect and the income effect, also known as the income effect. The latter is used to define the consequences that the variation in purchasing power causes on the demand for a product.

The income effect is based on the fact that when an alteration in the price of a product is made, an alteration in the quantity demanded by the population of that product is produced, the income effect being the resulting adjustment in the quantity demanded It depends on the modification of the real income.

That is, the income effect measures the variation in the consumption of a product as a result of a change in the price of this and therefore in the purchasing power of the general population. It is therefore the response to the change in purchasing power in which consumers vary the amount they demand of a product.

Types of income effect.

The income effect can be classified into three types based on the relationship between the asset in question and income.

  • Negative income effect: it is negative in those cases in which the asset is lower than the income. This income effect occurs when goods are inferior.
  • Null income effect: it occurs in those cases in which the property is completely independent of income. Therefore its variations do not affect demand.
  • Positive income effect: it is one in which the property has a normal behavior in the face of income variation. Resulting in a positive income effect.

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