income effect

income effect

the change in CONSUMERS’ real INCOME resulting from a change in product PRICES. A fall in the price of a good normally results in more of it being demanded (see THEORY OF DEMAND). A part of this increase is due to the real income effect (i.e. income adjusted for changes in prices to reflect current purchasing power). If a consumer has a money income of, say, £10 and the price of good X is £1, he can buy 10 units of the product; if the price of good X now falls to 50 pence, he can buy the same 10 units for only £5. The consumer now has an ‘extra’ £5 to spend on buying more of good X and other goods. The income effect, together with the SUBSTITUTION EFFECT, provides an explanation of why DEMAND CURVES are usually downward sloping. See CONSUMER EQUILIBRIUM, REVEALED PREFERENCE, PRICE EFFECT.

See INCOME-ELASTICITY OF DEMAND.

References in periodicals archive ?
This one-time goodwill impairment charge, a non-cash impairment of goodwill in the Autoliv Nissin Brake Systems (ANBS) joint venture (of which Autoliv owns 51%), will have a net income effect to Autoliv of approximately USD100m in Q4 2017.
A non-cash impairment of goodwill in the Autoliv Nissin Brake Systems joint venture, of which Autoliv owns 51%, with a net income effect to Autoliv of approximately $100M in Q4.
Car sales, even when oil prices tripled, continued to grow in the last 10 years because there is also an income effect in addition to a price effect,' Chua noted.
The change from fair value accounting to ASU 2016-07 has a current-period income effect, be it favorable or unfavorable.
Similarly, the income effect from falling energy prices in 2015 is unlikely to be repeated.
An income effect induced by the crowding out of private insurance generates an additional benefit to social insurance when it takes the form of a linear income tax.
In essence, in these cases the income effect works against the substitution effect: suddenly wealthier consumers purchase less Ramen noodles and fast food even though they can now afford to buy more of those goods.
Accordingly, the income effect leads people to want to buy more leisure as their real wages rise.
Using Social Security Administration data on all new DI beneficiaries from 2001 to 2007, we document a robust income effect of DI payments on earnings.
For endowment effects work in opposition to the usual income effect: while a higher price of a consumption good induces a negative income effect (provided the good is normal), a higher price of a good in which the consumer has some initial endowment induces a positive income effect.
The income effect refers to the fact that as households' incomes rise, their consumption increases (up to a point of satiation), while the substitution effect states that households' consumption patterns are affected by changes in the relative prices of goods.
This finding is important even though numerous studies have found a positive correlation between income and physical activity because it suggests that the income effect works differently on the extensive and intensive margins.