income effect

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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 ?
The consumer theory we teach at our universities presumes that purchases made by the head of the household satisfy all members of the household and therefore consumer behaviour is always perfectly rational.
It exists everywhere throughout advanced microeconomics, from the beginning of consumer theory to the end of production theory.
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The behavioral perspective model of purchase and consumption: From consumer theory to marketing practice.
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Consumer theory. Retrieved December 1, 2007 from http://en.widipedia.org/wiki/Consumer_theory
In the present paper a critical revision of some assumptions is made that underlie in the Neoclassical Consumer Theory, specially those referring to characteristics of the Economy Agent or Consumer, which is identified in Literature, and throughout this paper also, as the Homo-Economicus or Economy Man equipped with an extreme rationality and a tendency towards the mathematical optimization in the consumption decisions.