income effect

  

Definition

A change in the demand of a good or service, induced by a change in the consumers' discretionary income.

Any increase or decrease in price correspondingly decreases or increases consumers' discretionary income which, in turn, causes a lower or higher demand for the same or some other good or service. For example, if a consumer spends one-half of his or her income on bread alone, a fifty-percent decrease in the price of bread will increase the free money available to him or her by the same amount which he or she can spend in buying more bread or something else. It is one of the two effects caused by a price change; the other is substitution effect.


Use income effect in a sentence

  • You must always keep up with the income effect so that you can adjust your prices properly to maximize your profits.

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  • The income effect was substantial as their price elasticity was demonstrated to be a key factor in their decision making process.

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  • I realized there would be an income effect and our items would sell less due to all the people in the neighborhood losing their jobs.

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