Income Effect
The income effect is the change in quantity demanded resulting from a change in real income (purchasing power) caused by a price change. When price falls, real income rises, typically increasing quantity demanded (for normal goods).
Real World
When Aldi and Lidl drove down UK grocery prices in the 2010s, shoppers' real incomes effectively rose — families used the savings to buy more organic and premium products, illustrating a positive income effect on normal goods.
Exam Focus
Distinguish the income effect from the substitution effect and state whether the good is normal or inferior.
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