The income effect of a price change:

Question

Quizplus · Accepted Answer

The income effect reinforces the substitution effect in the normal good case. When the price of a normal good increases, the income effect reduces the quantity demanded of the good because the decreased purchasing power of income reduces the overall quantity demanded of all goods, including the one in question. This reinforces the substitution effect, which is the tendency of consumers to switch to alternative goods when the price of a good increases. Therefore, the net effect is a larger reduction in quantity demanded than would be achieved by the substitution effect alone.

The Income Effect of a Price Change