Income Effect

The income effect refers to how a change in the price of a good influences a consumer's overall purchasing power and, consequently, their demand for that good. When prices decrease, consumers feel wealthier because their money can buy more, often leading them to buy more of the product or other goods. Conversely, if prices rise, they feel poorer and might reduce their consumption. Essentially, the income effect highlights how price changes impact a person's ability to afford goods and services, affecting their buying decisions even if their actual income remains the same.