What is the income effect?
A)The effect of a change in income on the demand for a product.
B)The effect of a change in income on the demand for a substitute product.
C)The effect of a price change on real income and therefore on the quantity demanded of a product.
D)The effect of a change in income on the demand for an inferior product.

Question

Quizplus · Accepted Answer

The income effect refers to the change in the quantity of a product demanded due to a change in real income, after adjusting for price changes. As real income increases, people can afford to buy more of a product, leading to an increase in quantity demanded. Similarly, as real income decreases, people may have to reduce their consumption of a product, leading to a decrease in quantity demanded. This effect is particularly important for normal goods, which are those for which quantity demanded increases as income increases.

What Is the Income Effect